How political connections exploit loopholes in procurement institutions for government contracts: Evidence from China

Abstract

Abstract Conventional studies show that political connections have significant distributional effects. Yet, the means by which political connections affect the distribution of economic resources has not been fully investigated. This paper examines the role of political connections in the allocation of government procurements in China by combining quantitative and qualitative evidence. For quantitative analysis, we focus on a specific type of political connections, namely revolving‐door recruitment. A unique dataset between 2016 and 2020 based on the contract‐level transaction records of government procurements and the resumes of listed firms' board members and executives is established. The results suggest that firms establishing political connections by recruiting former government officials acquire more government procurements in the connected jurisdictions. Complementing with qualitative analysis from two publicly reported judicial cases, we show that political connections exploiting the loopholes in procurement institutions, including manipulating procurement methods, setting up restrictive requirements, and intervening in the process of expert evaluation, drives the allocation of government procurements. The results demonstrate that political connections exploit the loopholes in the context of weak institutions to benefit companies.

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