Speed of Payment in Procurement Contracts: The Role of Political Connections

Abstract

We study a new channel through which politicians exchange favors with campaign donors: faster payment in procurement contracts. We exploit an electoral reform in Brazil that bans corporate contributions and partially breaks down the relationship between donors and politicians. Using a within-firm difference-in-differences identification strategy, we find that connected firms experience longer payment terms post-reform in cash-constrained municipalities, where payment delays are more prevalent. We also find effects for contracts awarded through a competitive tendering process, where alternative forms of favoritism are more difficult to exploit. Our results highlight the importance of designing rules that curb discretion over the contract execution process in government purchases.

Keywords: Payment timeliness, public procurement, political connections

JEL Classification: D72, H57, H72