Donating to political parties in power increases the value of government contracts

Companies that donate to the governing party are hired for more contracts and at a higher price, finds new research from BI Norwegian Business School.

Private-sector firms in countries such as the Czech Republic, UK, and Germany can donate directly to political parties. However, concerns over potential conflicts of interest may arise. Political parties showing favouritism for donating companies could distort party spending away from normative principles. This could lower social welfare, increase inequality across social groups and have severe economic implications.

Benny Geys, Professor in Economics, alongside Dr. Vitezslav Titl from Katholieke Universiteit Leuven, studied the effects of companies donating to political parties on the allocation of procurement contracts. They found that increasing donations to the party in power or gaining power is associated with an increase in the value of a company’s procurement contracts. For example, a construction company or tech company donating to an in power political party could see their contracts increase in value by 0.5-0.6%.

Specifically, the donating firms receive more small contracts with fewer restrictions in the allocation process, face fewer rival bidders in open procurement procedures, and win with bids above the estimated cost of the contract.

One possible explanation may be that donations buy access to long-term relationships between parties and firms. This favouritism might be beneficial, as the procurement procedure runs more smoothly, or harmful, with contracts being allocated to a lower quality company.

These findings were published in the European Economic Review.

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For more information, a copy of the research paper, or to speak with Prof. Benny Geys, please contact Kyle Grizzell from BlueSky PR on 01582 790709 or at kyle@bluesky-pr.com