Speed of Payment in Procurement Contracts: The Role of Political Connections

Abstract

We provide evidence of a new channel through which politicians can exchange favors with campaign donors: earlier payment in procurement contracts. We exploit an electoral reform in Brazil that bans corporate contributions and partially breaks down the relationship between donors and politicians. Using a within-firm difference-in-differences identification strategy, we find that connected firms experience longer payment terms post-reform. The effect is particularly relevant in municipalities with low liquidity, where payment delays are more common, and for contracts awarded through a competitive tendering process. Our results highlight the importance of designing rules that curb discretion over the contract execution process in government purchases.