Political connections and misallocation of procurement contracts: Evidence from Ecuador

Abstract

We use new administrative data from Ecuador to study the welfare effects of the misallocation of procurement contracts caused by political connections. We show that firms that form links with the bureaucracy through their shareholders experience an increased probability of being awarded a government contract. We develop a novel sufficient statistic – the average gap in revenue productivity and capital share of revenue – to measure the efficiency effects, in terms of input utilization, of political connections. Our framework allows for heterogeneity in quality, productivity, and non-constant marginal costs. We estimate political connections create welfare losses ranging from 2 to 6% of the procurement budget.