Public corruption and the allocation of government contracts

Public corruption in the government procurement process is rampant and its cost is huge, even among developed countries. Some scholars estimate that about 20%-30% of the values of government projects are lost due to public corruption. In this paper, we examine how public corruption impacts the allocation of U.S. federal contracts. Using the U.S. Department of Justice corruption convictions data and the federal contract data from 2000 to 2018, we find that firms located in more corrupt states receive more federal contract dollars, more important contracts in terms of their contributions to firm revenues, and contracts with higher visibility among federal contractors. We construct an influence/favoritism index that takes into account defense contracts, cost-plus contracts, and multi-year contracts, and document that the index is positively related to corruption levels. These results hold after we conduct several robustness tests, including 2SLS regressions, propensity-score matching analysis, and using alternative corruption measures. Our empirical findings are consistent with the hypothesis that corruption plays an important role in how federal contracts are allocated.