Do public sector budget and spending rules facilitate political reciprocity?

• In Event: Accountability in Government

Abstract

Politicians who prize electoral benefits implement the monitoring and control systems that set the boundaries for bureaucratic budget and spending decisions. Monitoring and control systems should eliminate waste, yet recent evidence suggests that federal government budget and spending rules instead encourage wasteful spending at predictable intervals during the fiscal year (Liebman and Mahoney, 2017). We examine government expenditures and provide a rationale for this puzzle: If the firms that benefit from wasteful spending support the electoral ambitions of politicians, then politicians have weak incentives to modify the budget and spending rules that encourage wasteful spending. Indeed, we find that politically connected firms appear to be a major beneficiary of the wasteful spending induced by budget and spending rules. Robustness tests show that politically connected firms benefit more from wasteful spending when firms’ political activity is higher and when politicians have more influence over procurement contract awards. We also find our results are replicable using alternate political connectedness proxies but are not replicable in placebo tests. Overall, our evidence suggests that government rules that encourage waste persist because politicians benefit from wasteful spending.

Authors

• Matthew Boland, Saint Mary's University, Halifax, NS

• David Godsell, University of Illinois-Urbana-Champaign