THE LION’S SHARE: EVIDENCE FROM FEDERAL CONTRACTS ON THE VALUE OF POLITICAL CONNECTIONS

Şenay Ağca, GWU Deniz Igan, IMF

September 8, 2015

Motivation

Value of political connections Long-standing question Empirically challenging to establish the

direction of causality An exogenous shock

September 11 and the start of the war in Afghanistan on October 7, 2001 Direct impact on defense spending Nondefense spending treated as control case

Outline

Some background Brief literature Federal budget and procurement processes

Empirical set-up Measuring political connections Research design

Findings Interpretation

LiteratureBudget and Procurement

Background

Are political connections valuable…

Important question for welfare and policy setting, with macroeconomic implications Engagement and policy stability,

adaptability, and coordination (long list) Evidence on politically connected firms

Better economic performance and stock market value (Fisman 2001, Faccio 2006, Goldman et al 2009, Cooper et al 2010)

…and why?

Reverse causality is a problem, so is the channel Quid-pro-quo?

Preferential access to finance (Khwaja and Mian 2005, Claessens et al 2008)

Bailout (Faccio et al 2006, Duchin and Sosyura 2012) Contracts (Goldman et al 2013, Tahoun 2014)

Access? Whom you know or what you know (Bertrand et al

2014) Losing congressional connection means losing

revenue (Blanes-Vidal et al 2012)

Our contribution

Direction is from political connections to contracts Address reverse causality / endogeneity

issues from contracts to political connections

Channel can be quid-pro-quo or access Put a number on the value of

connections Compare different ways to establish

connections

Budget process

Agencies submit their requests to the Office of Management and Budget (OMB) between September and December (e.g. September-December 2001)

The President submits the budget to Congress in February (e.g. February 2002)

Congress passes a budget resolution and approves funding for discretionary spending – fiscal year starting in October (e.g. October 2002)

Procurement process

Budget formulati

on

Legislative action

Actual execution

Procurement process

Pentagon covered by: DoD Appropriations Bill Military Construction Appropriations Bill

Acquisition personnel post solicitation on FedBizOpps and evaluate the offers in accordance with Federal Acquisition Regulation

All awards reported for public transparency on Federal Procurement Data System

DataDesign

Empirical set-up

Data

Federal contracts Center for Effective Government (an OMB watchdog) Focus on DoD versus other (Agriculture, Energy, Health, etc) Only corporations and awards > $200K

Political connections Lobbying

Senate Office of Public Records Semiannual reports

Campaign contributions Federal Election Commission PAC contributions to winning candidates

Board connections Boardex Connections to armed forces

Research design

Pre-event period

• Budget request: Sep–Dec 1999

• Approved funds for: Oct 2000–Sep 2001

• Lobbying in: Jan–Dec 1999

• Campaign in: 1998 election cycle

Event period

• Budget request: Sep–Dec 2000

• Approved funds for: Oct 2001–Sep 2002

• Lobbying in: Jan–Dec 2000

• Campaign in: 2000 election cycle

Post-event period

• Budget request: Sep–Dec 2001

• Approved funds for: Oct 2002–Sep 2003

• Lobbying in: Jan–Dec 2001

• Campaign in: 2000 election cycle

Differences in differences

Main question: Do politically connected firms get larger

contracts when available funding increases? Two treatment effects

Defense versus nondefense contracts Politically connected versus unconnected

Regressions:(1) Contractit= β1*Connectionit + β2*Connectionit*Posteventt + ni + yt + εit

(2) Contractit= β1*Connectionit + β2*Defenseit + β3*Connectionit *Posteventt + β4*Defenseit*Posteventt + β5*Defenseit*Connectionit + β6*Defenseit*Connectionit *Posteventt + ni + yt + εit

Main resultsInterpretation

Findings

Defense budget authority and outlays increased substantially 2002 onwards

Pre-event Event Post-event24.6

24.7

24.8

24.9

25.0

25.1

25.2

25.3

25.4

25.5

25.6

25.7

25.8

25.9

26.0Total Contracts (log)

Defense

Nondefense

1998 1999 2000 2001 2002 2003 2004 2005 20060

100

200

300

400

500

600

Defense

Nonde-fense

Discretionary Spending(billion dollars)

Both defense and nondefense firms somewhat intensified political activities

LOBBYING Pre-event Post-event Difference

Defense 0.50 0.55 0.05

Nondefense 0.24 0.28 0.04**

Difference 0.26*** 0.27*** 0.01

CAMPAIGN CONTRIBUTIONS

Pre-event Post-event Difference

Defense 0.15 0.16 0.01

Nondefense 0.05 0.06 0.01

Difference 0.10 0.11 0.00

Average defense contract size increased substantially more for lobbying firms

Defense firms

Pre-event

Post-event

Diff.

Lobbying 16.35 17.98 1.63***

Non-lobbying

15.47 15.58 0.11***

Difference 0.88***

2.40***

1.52***

Pre event Event Post event12

13

14

15

16

17

18

19

20

Average Contract Size for Defense Firms

Log(c

ontr

act

am

ount) Lobbying

Non-lobbying

The difference is economically meaningful

Lobbying firms receive 92 percent larger defense contracts after the event than firms that are not lobbying

For defense firms, spending an extra $1 for lobbying brings in $2.5 in contracts after the event

Defense only Nondefense only

Pooled

Lobbying -0.0012 -0.0224* 0.0095 0.0118 0.0115

Postevent*Lobbying

0.0496*** -0.0050 -0.0051

Defense*Lobbying

-0.0334**

Postevent*Defense

0.0618***

Postevent*Lobbying*Defense

0.0547***

Similar picture for campaign contributions

Pre-event

Post-event

Diff.

Contributing 17.68 18.40 0.72

Non-contributing

15.48 15.65 0.17

Difference 2.20***

2.75***

0.55**

Contributing

Non-contributing

Pre event Event Post event13

14

15

16

17

18

19

20

Average Contract Size for Defense Firms

Log(C

ontr

act

siz

e)

but not significant in regression analysis

Defense only Nondefense only

Pooled

Campaign 0.0445 0.0459 -0.0131 0.0122 0.0123

Postevent*Campaign -0.00204   -0.0308* -0.0311*

Defense*Campaign 0.0880***

Postevent*Defense 0.0336

Postevent*Campaign*Defense 0.0292 Firm fixed effects take away the difference

Board connections significant, statistically…

Pre-event

Post-event

Diff.

Connected board

16.29 17.35 1.08**

Unconnected board

15.51 15.68 0.17***

Difference 0.78**

1.42***

0.91***

Connected board

Unconnected board

Pre event Event Post event15.0

15.5

16.0

16.5

17.0

17.5

18.0

Average Contract Size for Defense Firms

Log (

Contr

act

siz

e)

…and economically

Median defense contract size is $1.3 million Firms with connected boards get $2.5 million after the event Firms with no board connections get $1.36 million

Defense only

Board connection

0.0517 -0.1310

Postevent 0.0423***

Postevent*Boardconnection

0.6170**

Joint specification

  DefenseNondefens

e Pooled

Lobbying -0.0366** 0.0140* 0.0137*

Post-event*Lobbying 0.0641*** 0.000393 0.000368

Campaign 0.0484 -0.0368 -0.0384

Post-event*Campaign -0.0609*** -0.0222 -0.0221

Board connection -0.0788   -0.0771Post-event*Board connection 0.505*   0.506*

Lobbying*Defense     -0.0499***Post-event*Lobbying*Defense     0.0637***

Campaign*Defense     0.0883*Post-event*Campaign*Defense     -0.0388

Post-event*Defense     0.0591*** Lobbying and board connections continue to have a

positive effect on the contracts granted when considered jointly – they are compliments (not substitutes)

Defense contracts - excluding top 10 contractors

Results are not driven solely by top contractors

  Lobbying Campaign Board connection

Lobbying -0.0322**    

Post-event*Lobbying 0.0528***    

Campaign   0.0460  

Post-event*Campaign   0.00154  

Board connection     -0.131Post-event*BoardConnection     0.631**

Placebo period

October 2004-September 2007 Iraq war has started in March 2003 – increased

defense spending has been ongoing during this period

No additional major event that should affect defense contracts October 2004-September 2005 -- pre-event October 2005-September 2006 – event October 2006-September 2007 -- post-event

No robust and significant effects of political activism

Checks

Using indicators instead of amounts – results are robust

Comparing defense to nondefense Controls for any trends in connections and contracts Visually no difference in pre- and post-

event contract amounts for nondefense Coefficients on Postevent*Connection are

insignificant in nondefense only sample Coefficients on Postevent*Connection*Defense

are significant in the pooled sample

Summary and interpretation

Exploit September 11 as an exogenous event that increased available government funding Political connections (through lobbying and

connected board members) help secure a larger share

Address the reverse causality / endogeneity problem, put a value to political connections, and compare alternative political connections Channel can be quid pro quo or access – we

cannot differentiate between these two channels

Further work

Connections to legislators? Differentiate between connection and

expertise?

Questions, comments welcome.

Thank you.