How Crony Capitalism Works

Higher campaign contrbutions by companies helps them to secure more federal government contracts at better terms that yield higher profits, says a new working paper from researchers associated with the Networks Financial Institute at Indiana State University. In “It’s a Sweetheart of a Deal: Political Connections and Federal Contracting,” economists Stephen Ferris and Reza Houston confirm earlier econometric findings that firms that make more contributions to politicians do better than companies that supply lower or no contributions. They measured political connections of firms by taking into account the size of political contributions made by each company’s political action committee (PAC) to directly to Congressional candidates and political parties and to their associated PACs.

Looking at all of the firms listed on the S&P 1500 Composite Index, they find that companies that make above median political contributions received 6.1 to 8.6 times more federal contracts than those making below median contributions. In addition, larger contributors receive larger contracts that are together nearly 17-fold more valuable than the aggregate of those contracts made with companies whose contributions fell below the median.

Additionally, Ferris and Houston wanted to find out whether larger contributors got better contractual terms, that is, sweetheart deals. To probe this, they constructed a four-point Sweetheart Index based on contractual terms that are clearly advantageous to the contractor but not necessarily so for the government. Specifically, they scanned government contracts for no-bid, cost-plus, multi-year, and exemption from cost and pricing data provisions. Obviously, all four provisions enhance the profitability of the contracts. So what did Ferris and Houston find?

We observe that contract terms are consistently more favorable for firms with stronger political connections The overall sweetheart index across all measures of political connectivity is 1.12 for firms making below median political contributions. The corresponding value for those firms making above median contributions is 1.41. The difference in these index values is statistically significant.

So politically connected companies, that is, those make larger contributions to politicians and parties, are not only more likely to be awarded government contracts, they are also more likely to get sweetheart deals. President-elect Donald Trump says that he is going to “drain the swamp” that is Washington, D.C. His own career as crony capitalist and his Carrier intervention do not provide much hope that he will do more than change the denizens who inhabit that particular swamp.