The Lion's Share: Evidence from Federal Contracts on the Value of Political Connections

Summary

Focus 

Corporations and governments frequently interact. Perhaps most notably, corporations provide goods and services to governments through procurement contracts. What is the value for firms of establishing political connections to facilitate these interactions?

Contribution 

We examine the value of political connections by asking whether they matter for how much a corporation receives in defense contracts from the US federal government. This is a good setting to understand the dynamics between the government and firms for several reasons. First, defense spending constitutes about half of federal discretionary outlays. Second, the defense sector is also one of the most politically active. Third, and differently from the previous literature, we examine a setting where government spending on defense increased unexpectedly. Namely, we look at defense contracts awarded right before and after the September 11 terrorist attacks and the Afghan war that followed. Due to the nature of our study, we are able to put a dollar value on these political connections. We also distinguish between channels based purely on political connections and those based on merit.

Findings 

Firms that lobby, those that contribute to election campaigns, and firms with board connections to the government received substantially more in contracts granted by the Pentagon. This is not driven by merit-based factors that indicate an ability to expand operations quickly to support defense efforts. The findings are more in line with a rent-seeking argument, although we cannot rule out the role of information- sharing. 

Abstract

We examine the role of political connections in receiving federal funds during an unexpected surge in government defense spending. While the data do not allow identification of a causal link, the analysis uncovers that politically connected firms were awarded larger amounts in federal contracts when available funds increased. Specifically, firms that lobbied received around one third more in the amount of defense contracts compared to those that did not lobby. Similar evidence holds for campaign contributions and board connections. The increase in the amount of contracts obtained is observed primarily for firms that had limited ability to efficiently support Pentagon efforts, and when contracts received less scrutiny. Between political connections and merit-based channels in government contracting, the results mainly, but not exclusively, support the first channel.

JEL classification: D72, G38, H57, H61, P16

Keywords: Lobbying, Campaign contributions, Board connections, Political connections, Corporate revenue, Government spending, Procurement, Federal contracts.