Political Firms, Public Procurement, and the Democratization Process

In 2008, an opposition coalition defeated the Paraguayan Colorado Party, which had been in power for 61 years, including 35 years of the longest dictatorship in South America. Using data of all the public procurement transactions from 2004 through 2011 and the political connections of the 700 largest public providers, this paper documents how the volume of contracts received by connected firms evolved after this landmark political change. It shows that firms connected with the first ring of power were punished and that there were efficiency gains, mostly in the form of institutions shifting to bigger and more competitive contracts, but that these gains were constrained by the scarcity of entrepreneurs able to step in to replace firms connected to the previous regime. This demonstrates that the potential economic benefits of democratization are hampered by the perverse rent-seeking entrepreneurial incentives created by a long-term single-party authoritarian regime.