Political donations, public procurement and government efficiency

Vitezslav Titl,Kristof De Witte,Benny Geys

doi:10.1016/j.worlddev.2021.105666

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.

Highlights

Public procurement contracts awarded by public-sector institutions account for 15 to 20% of GDP in most developed countries (OECD, 2013)
This paper studies the public sector efficiency implications of distortions in the allocation of public procurement contracts
While politically connected firms might foster local efficiency, it is plausible that such donations have negative efficiency implications due to their distortive effect on the allocation of public procurement contracts and their association with less restrictive allocation procedures in public procurement contracts (Titl and Geys, 2019)

Summary

Introduction

Public procurement contracts awarded by public-sector institutions account for 15 to 20% of GDP in most developed countries (OECD, 2013). The subsequent question about such distortions’ impact on the nature and quality of public good provision has received little attention From both an academic and public interest point of view, it is essential to understand whether and why distortions in the allocation of procurement contracts have broader economic implications. The ensuing misallocation of resources can induce provision at excessive cost compared to the situation where contracts are allocated optimally (i.e. to the most competitive bidders) This is a matter of productive efficiency (i.e. maximum production at minimum cost), and directly leads to the proposition that distortions in procurement contract allocations due to firms’ donations to political parties may have a negative impact on public sector efficiency

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Conclusion