Expiring budgets and the return of political connections: evidence from Brazil

Abstract

Do fiscal policy regulations affect the degree of political favouritism in the allocation of public resources? To answer this overlooked question, we investigate whether and how the interaction of two customary practices of democracies, namely campaign financing by corporate contributions and the presence of expiring budgets, affect the allocation of procurement contracts across firms in the context of Brazil. Using OLS regressions with fixed effects, we document three complementary findings. First, we document that procurement activity peaks in the last quarter of the fiscal year in Brazil. Second, we find that contributing firms win between 11.6 and 13.4 per cent more procurement tenders than non-contributing ones. Third, our preferred specification shows that the return of campaign contributions increase 2.65 p.p. in the last quarter, which corresponds to 20 per cent of its most pronounced estimate. Our main findings are robust to very stringent fixed-effect specifications that eliminate biases caused by omitted firm-specific trends across years and sector- and town-specific trends across quarters. Our findings reveal a previously unknown link between fiscal policy regulations and political favouritism.