The Peer Effects in Government Contracting

Abstract

We examine the extent to which peer effects explain corporate government contracting. From the observational learning perspective, managers rationally mimic the behavior of peer firms to benefit shareholders. Using a sample of U.S. firms for the period 2002-2017, we provide the first direct empirical evidence of peer effects in the procurement of government contracts. Peer firms also influence the appeal for sweetheart provisions included in awarded contracts. Finally, peer-effects-induced government contracting matters for investment efficiency and long-term performance. Our results are robust to adjustments for possible endogeneity.