The Effects of the 2015 Brazilian Ban on Corporate Contributions

• In Event: Campaign Contributions

Abstract

Corporate campaign contributions have long been suspected of short-circuiting the democratic process. In developing countries, weak institutions offer even less protection from capture of the policy making process by firms and interest groups.

Despite growing evidence documenting that contributing firms receive more government contracts, the literature studying political connections is relatively silent about whether and how campaign financing reforms affect the economic power of contributing firms. The notable exception is Baltrunaite (2019), who shows the advantage of contributing firms in the allocation of government contracts in Lithuania completely vanishes after a ban on corporate donations. However, it is still unclear whether a corporate contribution is effective in diminishing the influence of contributing firms when there are mechanisms to circumvent the ban.

We study the impact of the 2015 ban on corporate contributions in Brazil and estimate the degree to which firms have been substituting large corporate donations with individual donations. We also identify a plausible causal effect of the ban on the allocation of procurement contracts.

A clear understanding of the consequences of such reform is of considerable policy interest. First, public procurement accounts for a considerable fraction of the global GDP. Second, procuring public goods and regulating corporate contributions to political campaigns are standard features to most countries. A ban on corporate contributions has ambiguous effects on procurement outcomes. On the one hand, it may reduce the influence of corporations in the allocation of government contracts by reducing the amount of money they give to political campaigns. On the other hand, the ban on corporate contributions may be ineffective or even counter-effective in reducing the influence of interest groups. First, some corporations may find mechanisms to circumvent the limits and increase the relative influence of their contributions. Second, the new forms of contribution may be less transparent than the previous ones.

Ultimately, whether and how a ban on corporate contributions reduces the influence of contributing firms on the allocation of government contracts is an empirical question. We exploit the 2015 ban on corporate contributions in Brazil to answer this question. To do so, we employ a difference in differences estimator that compares procurement outcomes of previously contributing firms before and after the ban on corporate contributions.
The causal interpretation of our findings relies on the non-testable assumption that outcomes would follow parallel trends in the absence of the reform. We provide support to this assumption by showing that outcomes follow parallel trends before the reform in our regression model.

Brazil is an ideal laboratory to study the consequences of a ban on corporate contributions. First, corporate contributions were the primary source of funding for expensive political campaigns before being banned. Second, it has been documented that Brazilian contributing firms received more government loans (Claessens et al., 2008; Carvalho, 2014) and wins more government contracts (Boas et al., 2014; Arvate et al., 2018) before the ban. Hence, we study the consequences of a ban on corporate contributions in a context where they are a relevant source of funding and buy influence on the allocation of government contracts.

Our first set of empirical exercises uses procurement data from the federal government from 2007 to 2018 and information on corporate contributions in the 2006, 2010, and 2014 elections to estimate the effect of the ban on corporate contributions on the probability of winning a procurement auction. In our preferred specification, the advantage of contributing firms in the likelihood of winning a procurement contract decreases 1.1% after the ban on corporate contributions, an effect that almost eliminates the 1.2% of the advantage earned by contributing firms during the baseline period. Around two-thirds of this effect is explained by a decrease in the probability of winning a non-competitive procurement procedure.

Our second set of exercises uses data on individual contributions from 2008 to 2016, and corporate contributions from 2004 to 2012 to test if large contributing firms use individual contributions of its members to continue as large contributors after the ban. In our preferred specification, members
of large contributing firms are three per cent more likely of making a large personal contribution after the ban on corporate contributions. Based on these estimates, around 15% of the large contributing firms continued as large contributors using the personal contributions of their members.

Authors

• Alexsandros Cavgias Martins Fraga

• Francesco Granella, Bocconi University