In new research, Benjamin Rosa finds that when states ban affirmative action, minority- and women-run businesses become smaller than other contractors and are less likely to enter the market, but are no more likely to close their businesses entirely.
Between its three levels—local, state, and federal—the United States government is the largest buyer on earth. At the state-and-local level, governments spend nearly $2 trillion (or six percent of the U.S.’ gross domestic product) per year purchasing a variety of goods and services, ranging from textbooks, medical supplies, and legal counsel to the construction of new highway infrastructure. Traditionally, state governments leveraged a portion of this spending power to support minority- and women-owned businesses operating as contractors, often through affirmative action policies. These policies largely began in the 1970s, and confer upon their beneficiaries several advantages when seeking to do business with the government, such as exclusive set-asides and business-training initiatives.
What happens when a state decides to end affirmative action? In new research conducted on a large and representative sample of state contractors, I find that without state affirmative action contracting policies, minority- and women-owned businesses are less likely to do business with the state and typically downsize, but are no more likely to cease their operations entirely.
In my study, I identify and measure the business outcomes of contractors in places with and without affirmative action. As of 2020, nine states had formal affirmative action bans. I focus on five of them by the date their bans were passed: Michigan (2006), Nebraska (2008), Arizona (2010), New Hampshire (2012), and Oklahoma (2012). While the New Hampshire ban was passed through legislation, the others were approved via ballot initiative, requiring a majority of a state’s voters to pass it. Once passed, these initiatives added language into their state’s constitution prohibiting the consideration of race, sex, or ethnicity in matters involving state funds, thereby eliminating affirmative action in contracting.
To find and assess business outcomes for contractors, my study uses expansive and confidential business survey data containing information on business ownership and revenues from state contracting between 2003 and 2017. This revenue information allows me to pinpoint businesses operating as contractors, and the ownership information tells me whether they were minority- or women-owned (or neither). By then linking these contractors to confidential employment and business operation records, I can assess how businesses responded to the removal of affirmative action.
My study uses what economists call a “triple-differences” design. Put simply, I contrast gaps in outcomes between minority- or women-owned businesses and other contractors in states with and without formal bans. I then look to see whether these gaps widen (or possibly even shrink) after a state bans affirmative action.
One can understand this design more intuitively as follows: if ending affirmative action fundamentally changes how minority- and women-owned businesses operate, researchers would expect to see gaps in outcomes between them and other businesses expand more rapidly following a state’s ban. For example, if a minority-owned contractor receives less business after a ban—as has been reported in Michigan—it may start laying off more workers relative to other enterprises. By running this “triple differences” analysis, I can quantify how much affected businesses change. The number that I find is considerable: five years after eliminating affirmative action, minority- and women-owned businesses become 10.9 percent smaller than other businesses, as measured by employee count.
While that number might be informative on its own, it is important to bear in mind that a lot is going on within it. For instance, it groups all minority- and women-owned businesses together, but the impact of banning affirmative action could conceivably be different for, say, Black-owned businesses compared to Hispanic-owned ones. There can also be differences for businesses located in different states. This possibility motivates the next stage of my study, where I consider how eliminating affirmative action impacts different groups of contractors.
Separating contractors by racial ownership reveals a distinctive pattern. There, I find that it is Black-owned contractors that are hit the hardest by these bans: in the years following a ban, Black-owned contractors become 18.8 percent smaller—almost 1.75 times the effect for all minority- and women-owned businesses at their lowest point. Moreover, the other racial categories are statistically unaffected, suggesting that much of the negative effects of banning affirmative action fall mainly on Black-owned businesses.
I find other notable differences in how affirmative action bans affect contractors. Namely, contractors in states with either high minority populations (like Arizona) or low minority populations (like New Hampshire) were largely unaffected, while minority- and women-owned businesses in states with moderate minority populations reduced their workforce by roughly seven percent. I further consider impacts by size. Curiously, it is not small contractors that are most affected by the elimination of affirmative action. Instead, it is the larger ones: the largest minority- and women-owned contractors shrank by 13.2 percent, while others made no changes. This result seems to suggest that the benefits of affirmative action may have accrued primarily to larger firms, as indicated by their post-ban employment decisions.
Aside from employment, banning affirmative action might also influence a firm’s decision to enter or exit the market. After all, if much of a contractor’s business comes from affirmative action-led state spending, it may no longer be profitable to operate following a ban, and new businesses may not form if they anticipate fewer opportunities absent affirmative action. On the new business formation front, I find that five years after a ban, states attract approximately 35 fewer minority- and women-owned contractors per year. The shutdown decision is more counterintuitive. Despite no longer benefiting from affirmative action, minority- and women-owned businesses are not more likely to shut down.
In the final part of my study, I use an economic model to explore implications for productivity and business sale values. I find that banning affirmative action is equivalent to reducing long-run minority- and women-owned business productivity by 8.6 percent. Sale values—defined as the value of the business if it were to be liquidated—decrease by 10 percent for these businesses after a ban, highlighting the extent to which bans affect businesses traditionally considered disadvantaged in contracting.
In sum, my research provides new evidence on how eliminating affirmative action affects the minority- and women-owned businesses seeking to transact with the government. The results come as renewed skepticism of affirmative action has led to its removal in even more states and federal orders banning it. Although further research is needed to evaluate these more recent decisions, at the minimum, my research shows how these bans have played out historically in different parts of the U.S.
Author Disclosure: The author reports no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
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