Scandinavian Working Papers in Economics

HoSS Working Paper Series,
Stockholm School of Economics, House of Sustainable Society (HoSS)

No 2026-5: Pricing Government Demand: Competition, Markups, and the Labour Share

Sampreet Singh Goraya (), Stjepan Srhoj () and Jurica Zrnc ()
Additional contact information
Sampreet Singh Goraya: House of Sustainable Society (HoSS), Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden
Stjepan Srhoj: University of Split
Jurica Zrnc: Croatian National Bank

Abstract: This paper studies how government demand affects the labor share of income. Winning a procurement contract lowers a firm’s labor share. The decline is driven by higher revenue per worker with limited pass-through to wages, and these revenue productivity gains reflect rising firm-level markups rather than improvements in physical efficiency. The effects are strongest for firms winning contracts as the only bidder. Evidence from bids, award prices, and political connections points to limited competition in procurement as the driving force. Government demand thus shapes the division of income between firm owners and workers, with implications for inequality.

Keywords: public procurement; market power; labor share; competition; political connections

JEL-codes: D24; D43; H57; L11; L22

Language: English

40 pages, September 28, 2026

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