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It's a Sweetheart of a Deal: Political Connections and Federal Contracting

Networks Financial Institute Working Paper Series 2016-WP-03

36 Pages Posted: 16 Nov 2016 Last revised: 22 Nov 2016

Stephen P. Ferris

University of Missouri at Columbia - Department of Finance

Reza Houston

Indiana State University - Scott College of Business

Date Written: November 15, 2016

Abstract

We examine whether political connections measured by political contributions influences the choice of terms included in government contracts awarded to firms. We construct an index of four “sweetheart” contract terms that are highly favorable to the firm, but not obviously advantageous to the government. We find that firms making larger political contributions more frequently have these terms included in their contracts. We then examine how changes in a firm’s political contributions influence the terms of subsequent contracts. We find that firms which increase their contributions are more likely to have these terms as part of their contract. We conclude that there is a political effect on the choice of terms included in federal contracts awarded to firms.

Keywords: Contracting, political connections

JEL Classification: G32; GT34; G38

Suggested Citation

Ferris, Stephen P. and Houston, Reza, It's a Sweetheart of a Deal: Political Connections and Federal Contracting (November 15, 2016). Networks Financial Institute Working Paper Series 2016-WP-03. Available at SSRN: https://ssrn.com/abstract=2869878 or http://dx.doi.org/10.2139/ssrn.2869878

Stephen P. Ferris (Contact Author)

University of Missouri at Columbia - Department of Finance ( email )

214 Middlebush Hall
Columbia, MO 65211
United States
573-882-6272 (Phone)
573-884-6296 (Fax)

Reza Houston

Indiana State University - Scott College of Business ( email )

800 Sycamore Street
Terre Haute, IN 47809
United States

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