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We study the effects of political connections on the public procurement market. Our main findings suggest that political connections - measured both by political affiliation of firm representatives and implicit connections based on frequency of contracts between a procurer and a supplier - increase the final price of procurement contracts allocated to connected firms given the estimated prices. Our evidence also suggests that public procurement authorities restrict competition in order to help connected firms and that the projects awarded to connected firms tend to be of lower quality as measured by the probability of repairs. To quantify the total distortion, we estimate a structural model of the public procurement market where connected firms are being favored by the procurers. Our lower bound estimate suggests that tenders allocated to favored firms are overpriced by 3.8% which would sum up to the total welfare loss of 0.5 billion CZK.
