Cycles of Nepotism: How Electoral Incentives and Political Connections Undermine Public Procurement

Abstract

This article examines cycles of nepotism in public procurement in developing democracies. We argue that electoral incentives create perverse incentives for corruption, leading incumbents to favor politically connected firms for public procurement contracts in exchange for kickbacks. This favoritism intensifies in the run-up to elections, when the need for campaign funds and public scrutiny are highest. Politicians strategically award contracts for harder-to-monitor projects, evading public and media oversight. Using the universe of public procurement contracts from the Philippines (2004-2019) and a Regression Discontinuity (RD) design, we show that politically connected firms are disproportionately favored for difficult-to-monitor contracts, such as flood-control projects, resulting in lower quality outcomes. Conversely, these firms are less likely to secure contracts for scrutinized projects like schools and health facilities. This study advances our understanding of how electoral incentives and political connections interact to undermine public procurement, highlighting significant welfare costs and offering policy insights for mitigating corruption in developing democracies.