Political Connections and Competition on Public Procurement Markets

We study the effects of political connections on the public procurement market. Our main findings suggest that political connections – measured both by political affiliation of firm representatives and implicit connections based on frequency of contracts between a procurer and a supplier – increase the final price of procurement contracts allocated to connected firms given the estimated prices. Our evidence also suggests that public procurement authorities restrict competition in order to help connected firms. Moreover, the projects awarded to connected firms tend to be of lower quality as measured by the probability of repairs. To quantify the total distortion, we estimate a structural model of the public procurement market where connected firms are being favored by the procurers. Subsequently, we calculate a lower bound of the total welfare loss caused the political connections. Our conservative estimate suggests that tenders allocated to favored firms are overpriced by 3.8% which would sum up to 5 billion CZK in the total sample of contracts in value of 227 billion CZK (due to data restrictions, we used sub-sample in the estimation of the structural model, in which the total welfare loss sum up to half a billion CZK).