Bruno Baranek, who holds a PhD in economics from Princeton University, and Vitesslav Titl, assistant professor of law and economics at the Department of Economics at Utrecht University. Originally published on VoxEU.
No country is safe from the risks posed by connections between politicians and private companies. Conflict of interest scandals plague governments around the world. This column uses a detailed data set from the Czech Republic to demonstrate that ties between political parties and government contractor boards lead to overpriced contracts without commensurate with quality improvements for citizens and consumers. I’m doing it. The authors also consider when and how increased oversight can reduce the negative effects of such connections, informing policy on conflicts of interest in public procurement.
Scandals involving conflicts of interest are rife in political circles in every country. For example, during the early stages of the COVID-19 pandemic, nearly a third of suppliers contracted for personal protective equipment (PPE) such as masks and gloves for healthcare workers. He had connections with British politicians and senior officials (Conn and Evans, 2020). Similar scandals have occurred in many other countries (for more examples, see Baranek and Titl 2021). These conflicts of interest raise legitimate concerns about inefficiency and corrupt practices, lead to reduced competition and innovation, and negatively impact economic growth (Baslandze et al. 2018) and welfare (Varghese et al. 2020). Masu. To address these issues, most countries have introduced rules to manage conflicts of interest. For example, the EU introduced rules on financial regulation in 2018 aimed at preventing the negative effects of conflicts of interest. Similarly, U.S. law, particularly 18 U.S.C. § 208 and the Code of Federal Regulations, prohibits public officials from taking any action involving an entity in which they, their spouse, children, or partners have a financial interest. Masu.
The public procurement market is a major channel through which political connections can be exploited. The scale of public resources allocated through these markets is enormous, with global public institutions accounting for approximately 12% of annual GDP (Bosio et al. 2022), or approximately one-third of all government spending (OECD 2013). We have concluded a corresponding contract. Baránek and Titl 2024 investigates the additional costs incurred in public procurement due to connections between politicians and businesses. Specifically, we trace these connections through politicians’ membership on corporate boards and direct ownership of the companies. When government agencies and firms share an affiliation with the same political party, we observe approximately 6% overpriced contracts. We also consider when and how increased oversight can reduce the negative effects of such political connections. This aims to inform policy makers on how to design rules regarding conflicts of interest in public procurement.
To address these questions, we develop a detailed dataset for the Czech Republic that tracks personal connections between companies and political parties through (supervisory) board membership and ownership by political candidates. Utilizes recent research using . In the Czech Republic, relatively few public tender suppliers have personal connections to political organizations, representing approximately 1% of all suppliers. However, these related suppliers accounted for 7% of the total public tenders, indicating that they received a disproportionately large share of public procurement contracts. This disparity is not necessarily problematic, but it does raise important concerns. On the one hand, personal connections can foster cooperation between businesses and government agencies and increase efficiency. On the one hand, and this is a common concern, favoring connected companies can create inefficiencies by awarding contracts to less competitive companies. It can also encourage increased corruption and create additional bureaucratic hurdles for unconnected companies (Shleifer and Vishny 1993).
An analysis of public procurement data from 2006 to 2018 found that contracts signed with politically connected companies have adverse outcomes at the contract level. These contracts are about 6% more expensive, but there is no corresponding increase in quality. This dataset includes public bodies across all levels of governance, including local governments, regions, central government, and other government-controlled entities such as state-owned enterprises. To measure the effect of political connections, we compare the contract price when the firm has active ties with the party that controls the government agency (i.e., the buyer) and when the firm does not have active ties with the government agency. Compare prices of contracts concluded by the same buyer in case. The political party in power. When politicians with ties to corporations lose or are elected, their ties to corporations change. During the study period, 11 elections resulted in approximately 370 changes in supplier connectivity status, providing a rich dataset for causal analysis. The main finding holds even when the analysis is limited to close elections, as it is difficult to predict in advance which parties will control the relevant public bodies. In such cases, contract assignment is effectively random, allowing for a clearer causal interpretation.
But even if contracts signed with politically connected companies are too expensive, the overall effect on the public sector and general welfare can be positive if the quality of the services provided is significantly higher. . To assess this possibility, we investigate whether politically connected firms provide higher quality services. Since measuring quality is difficult due to the lack of commonly available data, we apply a text analysis-based method proposed by Baránek (2020). This method uses the contract’s short description, contract date, and other details to estimate the total lifetime cost of the contract. construction project. This approach allows us to track the number and cost of repairs in the studied construction projects. The findings revealed a statistically small and non-significant negative impact on the quality of projects delivered by connected companies. The diagram below shows the impact on price and quality, highlighting the stark contrast between significant price increases and lack of quality improvements. Note that the quality measure is based on inverse quality. This means that it reflects a slightly higher lifetime cost.
Figure 1 The impact of political connections on contract-level prices and quality
Note: Price effect measured as a relative percentage to the baseline engineering estimate. So this figure shows pricing 6% above engineering costs. Reverse quality is measured using the entire lifetime cost of a construction project, which consists of subsequent repairs.
From a policy perspective, it is important to understand how incentives in public procurement work. Although some procurers may restrict competition or exercise discretion to favor certain companies (Orlando et al. 2018), the main channel is to provide benefits to affiliated companies. It seems that the solution is to adjust the project specifications to bring about the problem. This includes customizing technical requirements to increase the competitiveness of preferred bidders. While abuses of discretion and restrictions on competition can often be addressed with simple policy solutions, the challenge becomes more complex when favoritism arises through contract tampering. Existing policies target the most obvious issues related to political connections, such as conflicts of interest, but these regulations only apply when politicians hold concurrent positions in private companies. The more nuanced relationship between political parties and corporations is not addressed. Our study suggests that strengthening oversight of contract performance can reduce the negative effects of political affiliation, especially when higher-level government authorities exercise oversight over lower-level government authorities . Given the importance of this finding for policy and the fact that causality cannot be definitively proven, we recommend further investigation of this topic in future research.
Original and available references
