Unproductive entrepreneurship in US military contracting
| Date | 15 August 2016 |
| DOI | https://doi.org/10.1108/JEPP-12-2015-0037 |
| Pages | 221-239 |
| Published date | 15 August 2016 |
| Author | Christopher J. Coyne,Courtney Michaluk,Rachel Reese |
| Subject Matter | Strategy,Entrepreneurship,Business climate/policy |
Unproductive entrepreneurship
in US military contracting
Christopher J. Coyne, Courtney Michaluk and Rachel Reese
Department of Economics, George Mason University,
Fairfax, Virginia, USA
Abstract
Purpose –US militarycontracting has been plagued bysystematic corruption, fraud,and waste during
both times of peaceand war. These outcomes result from theinherent features of the US military sector
which incentivize unproductive entrepreneurship. The paper aims to discuss these issues.
Design/methodology/approach –Drawing on the insights of Baumol (1990) as their base
theoretical framework, the authors explore how the industrial organization of the US military sector
creates incentives for unproductive entrepreneurship. Evidence from US government reports
regarding US efforts in Afghanistan and Iraq is provided to illustrate the central claims.
Findings –The military sector is characterized by an entangled network of government bureaus and
private firms whose existence is dependent on continued government spending. These realities,
coupled with a dysfunctional procurement processes, reward unproductive behaviors during
peacetime. During wartime these incentives are intensified, as significant emergency resources are
injected into an already defective contracting system. The recent experiences in Afghanistan and Iraq
illustrate these dynamics.
Originality/value –The authors make three main contributions. First, contrary to common
treatments by economists, much military spending fails to meet the definition of a public good. Second,
waste, fraud, and abuse in military contracting is a result of rules and the incentives those rules create.
Third, the only way to change the situation is to change the overarching rules governing the people
operating in the military sector.
Keywords Rent seeking, Firm performance, Entrepreneurial action, Political entrepreneurship,
Entrepreneurial opportunity, Organizational structure
Paper type Research paper
1. Introduction
The March 8, 1943 issue of Time magazine ran the headline “Investigator Truman”
along with a picture of Missouri senator Harry Truman. Truman, who would go on to
become president two years later, received national attention for his role in leading the
Special Committee to Investigate the National Defense Program which was charged
with investigating defense contracts awarded during Second World War (Riddle, 19 64).
It is estimated that Truman’s Committee found at least $15 billion in waste, fraud, and
mismanaged contracts (Hamilton, 2009, p. 301). Over six decades later, in 2011, the
bipartisan Commission on Wartime Contracting in Iraq and Afghanistan released its
final report. The report opened by noting that, “At least $31 billion, and possibly as
much as $60 billion, has been lost to contract waste and fraud in America’s contingency
operations in Iraq and Afghanistan. Much more will turn into waste as attention to
continuing operations wanes, as US support for projects and programs in Iraq and
Journal of Entrepreneurship and
Public Policy
Vol. 5 No. 2, 2016
pp. 221-239
©Emerald Group Publis hing Limited
2045-2101
DOI 10.1108/JEPP-12-2015-0037
Received 14 December 2015
Revised21February2016
Accepted 22 February 2016
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2045-2101.htm
The authors thank an anonymous referee and the editor for useful comments and suggestions for
improvement. An earlier version of this paper was presented at the annual Southern Economic
Association meetings in New Orleans, LA, November 21-23, 2015. The authors thank conference
participants for useful feedback and suggestions. Finally, the authors thank David Lucas for
research assistance.
221
US military
contracting
Afghanistan declines, and as those efforts are revealed as unsustainable”(Commission
on Wartime Contracting in Iraq and Afghanistan, 2011, p. 1). Indeed, fraud, waste, and
corruption were rampant throughout the interventions in Afghanistan and Iraq as
illustrated by the following sample of news headlines:
•“US Audit Finds Fraud in Iraq,”New York Times, July 31, 2004.
•“Audit Describes Misuse of Funds In Iraq Projects,”New York Times,
January 25, 2006.
•“Texas Tycoon Pleads Guilty To Iraq-Oil Kickback Scheme,”Wall Street Journal,
October 2, 2007.
•“US Widens Fraud Inquiry Into Iraq Military Supplies,”New York Times,
August 28, 2007.
•“$6 Billion in Contracts Reviewed, Pentagon Says,”New York Times,
September 21, 2007.
•“Graft in Military Contracts Spread From Kuwait Base,”New York Times,
September 24, 2007.
•“Iraq Auditor Warns of Waste, Fraud In Afghanistan,”The Washington Post,
February 2, 2009.
•“War zone corruption allegations up sharply,”USA Today, June 18, 2010.
•“Special IG for Afghan reconstruction cites rampant fraud, waste,”Stars &
Stripes, January 10, 2013.
•“Kickback scandal rocks Army,”USA Today, February 4, 2014.
What is the source of this persistent and systematic corruption, waste, and fraud in
military contracting decade after decade[1]?
We provide an economic, rule-based explanation to this question. From this perspective
rules create payoffs which direct entrepreneurs toward productive (positive sum)
or unproductive (zero- or negative sum) behaviors (Baumol, 1990). Our central argument is
that the aforementioned outcomes in Afghanistan and Iraq are the direct result of
systematic features of the US military sector which incentivize unproductive
entrepreneurship. The US military sector is characterized by an entangled network of
government bureaus and private firms whose existence is largely dependent on continued
government funding and spending. This environment attracts and encourages
unproductive behaviors in both peacetime and wartime. Times of war are especially
unique because the incentives for unproductive behavior are magnified due to the injection
of significant amounts of additional funds with the added pressure to spend quickly in a
rapidly changing conflict environment.
Our analysis contributes to three strands of literature. The first deals with the
literature on entrepreneurship and the role that rules play in directing entrepreneuria l
behavior (Boettke and Coyne, 2003, 2009; Harper, 2003; Coyne and Leeson, 2004; Sobel,
2008). Our contribution to this literature is to provide a specific example of how
institutional rules influence entrepreneurial alertness in the context of foreign policy
and the government-provision of defense. Second, we contribute to the literature on the
US military sector (Yarmolinsky, 1971; Melman, 1970, 1971, 1985; Higgs, 1987, 2004,
2005, 2006, 2012; Hooks, 1991; Dunne, 1995; Duncan and Coyne, 2013a, b, 2015).
Among other things, this literature considers how the industrial organization of the
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