On the Cost of Favoritism in Public Procurement

A new working paper (with Bruno Baranek) on the role of personal political connections in public procurement is now available as Discussion Paper of the Department of Economics at KU Leuven. 

Our findings, on detailed data on firm representatives’ political affiliations in the Czech Republic, show that favoritism to politically connected firms increases the price of procurement contracts by 8% of the estimated costs while no gains in terms of quality are generated. Interestingly, these adverse effects of political connections are not present for procurement contracts that get additional oversight from a higher level of the government, because they were co-funded by the European Union. Based on our estimates, the total procurement expenditures increased by 0.48% due to the favoritism. Finally, we discuss and document channels of such favoritism, and present suggestive evidence that politicians tailor technical specifications of projects to fit the comparative advantage of specific firms.