Political donations, public procurement and government efficiency

Abstract

Public procurement markets are worth 10–15% of global GDP. Recent empirical evidence suggests that firms’ political donations can induce important distortions in the allocation of public procurement contracts. In this article, we employ a non-parametric efficiency model to study the implications of such distortions for the regional governments’ efficiency. Using a unique dataset covering the Czech regions over the 2007–2017 period, we find that the efficiency of public good provision is lower when a larger share of public procurement contracts is awarded to firms donating to the party in power (‘party donors’) – even when we account for quality differences in public goods provision. We link the dependence on politically connected firms to the institutional design of the procurement allocation process (i.e. the use of less restrictive and less open allocation procedures), which helps explaining the mechanics behind the observed decrease in efficiency.