Corruption in Procurement and Shadow Campaign Financing: Evidence from Russia

Abstract: Using a unique data set on shadow bank transactions of firms in Russia, we show that firms which get public procurement contracts have abnormally high transfers to flight-by-night firms within 4 weeks from the date of elections of regional governors in regions where these firms are located. In contrast, firms with no public procurement have no political cycle in their transfers to flight-by-night firms. Using variation in the quality of tax inspectors as a source of exogenous variation in shadow transfers made by firms, we document a causal relationship from the shadow election financing to obtaining public procurement contracts. We also show that shadow transactions are more closely related to public procurement in more corruption regions. A placebo experiment with election dates confirms the validity of our estimates.