Political Donations Lead to Sweetheart Deals in Contracts

MEDIA CONTACT: Jim Hellegaard
561-319-2233, jhellegaard@fau.edu

BOCA RATON, Fla. (November 19, 2018) – Companies that make political donations are more likely to be awarded government contracts with terms containing “sweetheart deals” for the firms, according to a new study by researchers at Florida Atlantic University, Ball State University and the University of Colorado-Colorado Springs.

The researchers looked at the effect of political connections on a firm’s federal contracting activity and found that connected firms are more likely to be awarded a government contract and their contracts are larger in size and represent a higher portion of their total sales. The study, to be published in the journal Financial Review, focused on four “sweetheart” terms that are clearly beneficial to the firm, but not so obviously advantageous to the government.

“We designed this Sweetheart Index that basically captures the sweetness of the deal,” said study co-author David Javakhadze, Ph.D., assistant professor of finance in FAU’s College of Business. “What we show is that the more political connections firms have the more likely they are to receive contracts with these sweetheart deals in it.”

Aggregating the presence or absence of a no-bid, cost-plus, multi-year and cost/pricing data exclusion terms into a Sweetheart Index, they found that firms with stronger political connections more frequently have these terms included in their contracts — the more these terms appear, the better the deal for the vendor and often not the taxpayer. This is reflected with higher values of the Sweetheart Index for these connected firms. Defense and aerospace industry firms have the highest scores on the index.

Javakhadze and his fellow researchers, Stephen P. Ferris, Ph.D., dean of the UCCS College of Business, and Reza Houston, Ph.D., assistant professor of finance at BSU, also found that increases in political contributions are associated with an increase in the Sweetheart Index for contracts awarded to these firms. Given that the government spends vast amounts on its contracts, the researchers believe a more complete understanding of how quid pro quo relations influence that process is necessary.

The findings suggest that political action committee contributions provide a unique mechanism of political connectedness beyond lobbying and the employment of former government officials. Finally, since the government does not obviously benefit from the inclusion of these “sweetheart” contract provisions, it suggests areas for reform or revision in federal acquisition regulations. 

“We found that these sweetheart deals create value for the firm, which is good for shareholders,” Javakhadze said. “Our preliminary evidence suggests that it is not good for taxpayers or efficient for government. Further research needs to establish more conclusively these implications.”

-FAU-

About Florida Atlantic University
Florida Atlantic University, established in 1961, officially opened its doors in 1964 as the fifth public university in Florida. Today, the University, with an annual economic impact of $6.3 billion, serves more than 30,000 undergraduate and graduate students at sites throughout its six-county service region in southeast Florida. FAU’s world-class teaching and research faculty serves students through 10 colleges: the Dorothy F. Schmidt College of Arts and Letters, the College of Business, the College for Design and Social Inquiry, the College of Education, the College of Engineering and Computer Science, the Graduate College, the Harriet L. Wilkes Honors College, the Charles E. Schmidt College of Medicine, the Christine E. Lynn College of Nursing and the Charles E. Schmidt College of Science. FAU is ranked as a High Research Activity institution by the Carnegie Foundation for the Advancement of Teaching. The University is placing special focus on the rapid development of critical areas that form the basis of its strategic plan: Healthy aging, biotech, coastal and marine issues, neuroscience, regenerative medicine, informatics, lifespan and the environment. These areas provide opportunities for faculty and students to build upon FAU’s existing strengths in research and scholarship. For more information, visit www.fau.edu.