Political connections and procurement in Hungary

We use firm-level panel data from 1992-2012 in Hungary to measure the effect of firms' political connections on the likelihood of them winning procurement contracts.

Using detailed data on individual names, we identify a firm as connected to a political party if a representative of the firm is on the ballot for that party in a local or national election.

We obtain three main results. (1) During an electoral cycle, the share, among connected procurement winners, of firms connected to the ruling coalition (left or right) increases by about 15 percentage points. (2) The composition of procurement bidders also adjusts, but even in the population of bidders, firms connected to the ruling coalition are more likely to win. (3) In the cross section, left-leaning municipalities are more likely to allocate construction contracts to left-leaning firms.

These results are consistent with political favoritism in procurement.