Political Connections and Allocation of Government Contracts : International Evidence

We examine whether political connections influence the public procurement award decisions made by government bodies of countries across the globe. We find that politically connected firms are more likely to receive government contracts and receive larger value contracts. Financial market and institutional development significantly moderate the effects of political connectedness. We also show that politically connected government contracting distorts the capital allocation efficiency. Government contracting induced by political connectedness matters for the aggregate risk-taking behaviors and valuation. Our results are robust to alternative variable definitions, estimation techniques, and adjustments for potential endogeneity