Fazekas, M., Skuhrovec, J., Wachs, J. (2017): Corruption, government turnover, and public contracting market structure – Insights using network analysis and objective corruption proxies. GTI-WP/2017:02, Budapest: Government Transparency Institute.
Many policymakers and researchers study and debate how to control and limit corruption. Few have examined the mechanisms by which corruption distorts markets and how they may be influenced to mitigate negative effects. To develop this new perspective, we study how corruption effects the structure of public contracting markets modelled as networks of connected buyers and suppliers. We examine the impact of political power-sharing on these networks via government turnover timing and frequency. We do so in two similarly corrupt countries with different electoral systems, the Czech Republic and Hungary. Measuring corruption at the contract-level using a composite index of corruption red flags, we find that high corruption risk public buyers have sparser local neighbourhoods, meaning that they contract with fewer suppliers than expected. A buyer with an additional corruption red flag on average has 10% fewer suppliers. Moreover, highly corrupt buyers change their networks 21-38% more extensively across years with government turnover, revealing how corruption distorts markets. The effects are larger and more abrupt in Hungary than in the Czech Republic, suggesting that the frequency of electoral contestation mitigates the negative economic impact of corruption.