Firm productivity and government contracts: The moderating role of corruption

Abstract Drawing on the literature examining asymmetric information issues emerging in public procurement, this research examines the interplay between current firm productivity and perceived corruption in determining the probability of firms to obtain government contracts. This study proposes that, in the absence of corruption, firm productivity is the main determinant of being awarded government contracts. In corrupt environments, however, most productive firms are excluded from bidding, and therefore, domestic-market oriented firms are better positioned to be awarded government contracts. To test this Hypothesis, a longitudinal database is constructed from the World Bank Enterprise Survey, containing 1,898 observations across 33 developing economies. The findings corroborate our hypotheses and shows that corruption negatively moderates the relationship between firm productivity and being awarded a government contract for pro-market firms. This moderation, however, is positive for rent-seeking firms. These findings point to an important policy implication. Since excluding pro-market firms from bidding increases the cost and reduces the quality of public services, one mechanism to ensure smarter public procurement decisions is to open bidding processes to exporting firms, which our evidence suggests pay less bribes and commit less informal acts than domestic-market oriented firms.