Bonding the Gap: Surety Bond Guarantee, Defaults, and Small Businesses

Abstract

When small and medium-sized enterprises (SMEs) submit bids or tender proposals for projects, they often encounter difficulties in obtaining a surety bond, which is a financial guarantee from a third party that they will meet their contractual obligations. Drawing on transaction cost economics, this study focuses on a seldom-studied phenomenon of third-party bond surety programs available to small businesses. For each one-unit increase in the bond guarantee percentage the odds of default decrease, higher project amount or subcontracting exacerbates the odds of default, and geographic distance between the business and project site does not affect default. The effect sizes are practically meaningful, and the inferences are robust to alternate specifications.