The Cost of Favouritism in Public Procurement

Bruno Baránek
Department of Economics, Princeton University
Vítézslav Titl
Faculty of Economics and Business, University of Leuven

Abstract:

We study the effects of favoritism in public procurement. Exploiting detailed data on firm representatives’ political affiliations in the Czech Republic, we show that favoritism
to politically connected firms increases the final price of procurement contracts while no gains in terms of quality are generated. To quantify the total distortion, we formalize a
model of the public procurement market where politically connected firms are favored by procurers. The calculation based on the model suggests that procurement contracts
allocated to favored firms are overpriced by at least 5%. Given the size of the market and the share of contracts delivered by politically connected firms, this induces a welfare
loss of .08% of Czech GDP. This can be considered a lower bound of the true welfare for several reasons laid out in the paper. Finally, we discuss and document channels of
such favouritism, and present suggestive evidence that politicians tailor technical specification of projects to fit the comparative advantage of specific firms.