Political Donations and the Allocation of Public Procurement Contracts

Abstract

We study whether and when firms’ donations to political parties induce favouritism in public procurement allocations. Our analysis builds on a unique, comprehensive dataset covering all public procurement contracts and all corporate donations to major political parties in the Czech Republic over the period from 2007 to 2014, and exploits changes in political control over regional governments within this period for identification purposes. We find that firms donating 10% more to a political party gaining (losing) power witness an increase (decrease) in the value of their public procurement contracts by 0.5–0.6%. Importantly, and in line with theoretical expectations, these effects only arise for contracts allocated under less restrictive procurement allocation processes. Assessing the underlying mechanisms, we show that donating firms receive more small contracts allocated under less regulated procurement procedures, face less competition in more regulated and open procurement procedures, and tend to win with bids further above the estimated cost of the procurement contract.