Exploring the Effect of Waivers to the Non-Manufacturer Rule on Contract Awards to Small Businesses

Abstract

The U.S. government regularly participates as a buyer in industrial markets where products are customarily sold through indirect marketing and distribution chains, separating buyers from manufacturers. In many cases, these marketing, distribution, and store-front activities add significant value for buyers, such as through pre- and post-sale service and support, improvements to product availability, and reductions in per-unit pricing (e.g., via economies due to warehousing, transportation, and ordering processes). Accordingly, the government (U.S. Small Business Administration) has, in some instances, issued class waivers to the requirements of the non-manufacturer rule (15 U.S.C. 657s) when no small business manufacturers exist for a product, such that contracts can be set aside for competition among small business non-manufacturers. This study models the effectiveness of class non-manufacturer rule waivers on the utilization of small business concerns. The purpose of the research is to obtain a better understanding of market and industry conditions in which these waivers are successful at driving small business utilization, as well as conditions where class waivers, once issued, tend to be poorly utilized. A time series panel of data derived from several archival sources was used to estimate a fractional response model with a Bernoulli quasi-maximum likelihood estimation methodology. Findings indicate that NMR waivers work best to increase small business utilization in industries characterized by low concentration and low levels of price inflation. Understanding these factors will inform policy and regulation.