Designer & contractor PCF1

|<br>PCF1||||||||0.14|
|---|---|---|---|---|---|---|---|---|
|||||||||(0.09)|
|Supervision period|0.32***|0.32***|0.29***|0.30***|0.31***|0.34***|0.37***|0.31***|
||(3.97)|(4.08)|(3.66)|(3.72)|(3.94)|(3.27)|(3.57)|(3.88)|
|Foreign supervisor|1.59|1.73|2.53*|1.79|2.15|4.32**|3.59*|1.59|
||(1.17)|(1.31)|(1.78)|(1.30)|(1.56)|(2.22)|(1.89)|(1.17)|
|Log contract value|1.27***|1.24***|1.22***|1.23***|1.30***|0.78*|0.87**|1.26***|
||(3.58)|(3.59)|(3.55)|(3.48)|(3.80)|(1.82)|(1.99)|(3.52)|
|Arab donor|1.58|1.81|1.76|1.60|1.60|1.67|1.23|1.57|
||(1.36)|(1.59)|(1.49)|(1.38)|(1.40)|(1.04)|(0.79)|(1.36)|
|Western donor|0.52|0.70|0.73|0.68|0.25|0.23|-0.37|0.52|
||(0.35)|(0.48)|(0.49)|(0.46)|(0.17)|(0.13)|(-0.20)|(0.35)|
|Sector FE|YES|YES|YES|YES|YES|YES|YES|YES|
|Governorate FE|YES|YES|YES|YES|YES|YES|YES|YES|
|Year FE|YES|YES|YES|YES|YES|YES|YES|YES|
|Constant|-18.97***|-19.82***|-<br>20.10***|-<br>18.69***|-19.93***|-14.55**|-13.64**|-18.91***|
||(-3.50)|(-3.97)|(-3.91)|(-3.59)|(-3.89)|(-2.33)|(-2.11)|(-3.50)|
|Observations|329|329|329|329|329|221|221|329|
|R2|0.28|0.29|0.29|0.28|0.30|0.34|0.33|0.28|

_Notes: Dependent variable is the log value of the discrepancy between initially awarded contract amount and actualized expenditures. PCF indicates dummy variables for all connected firms. PCF1 captures firms connected to the inner circle of elites that controls the CDR board. PCF2 includes firms of all political elites. Regression model uses robust standard errors; The table shows beta coefficients and t-statistics in parentheses; Significance levels: * p<0.10, ** p<0.05, *** p<0.01._

# **5. Addressing endogeneity: Complex projects or cartels?**

We can think of two narratives to explain the correlation between the political connections of design consultants and our outcome variables. In the first one, consultants “implement” deals struck between elites and connected contractors. Elites would pre-allocate contracts among connected firms and leverage their connections to designers in order to ensure that the “right” firm is winning a given tender with a margin above what a competitive market would yield. As the designer is involved in both the formulation of tender documents as well as evaluation of bids, designers have a range of tools at their disposal to reduce _searching costs,_ such as by tailoring documents to specific firms, excluding allegedly noncompliant bids of competing firms, or enabling the filing of claims or variation orders due to unspecific or poor project design. Consultants would be compensated for their involvement, notably for the risks to be discovered while implementing the deal, via kickback payments, either in the form of direct cash payments or inflated supervision contracts.

In the second narrative, PCF1 designers are qualified to take on more technically demanding projects. These projects would be larger than the average because of their higher technical provisions and are more likely to be overspent because of the difficulty to foresee all eventualities. In this narrative, consultants would ascend to better connections as they are firms with specific technical capacities that implement more demanding projects.

We cannot formally address this classic endogeneity problem in our setup as this would require additional data on past firm performances and extensive fieldwork with a wider set of firms. However, based on a review of CDR’s governance and additional tests, we argue that narrative two is implausible in 17