Corporate Labor Misconduct and Government Contract Termination for Convenience

Abstract

A prominent feature of government contracting is that the federal government has a unilateral right to terminate the contract for convenience as long as the termination is in “the Government’s interest.” We provide the first large sample evidence on government contract termination for convenience and examine whether it can be triggered by contractors’ labor misconduct. We find that when contractors were penalized for serious labor misconduct in the previous year, their government contracts are more likely to be terminated for convenience. The effect is stronger when the misconduct is more severe or recurring, when the contractor receives higher media attention, and when competition for government contracts is more intensive in the industry. In contrast, we find no evidence that contractors’ non-labor misconduct, including environmental and financial misconduct (e.g., accounting fraud), is associated with contract termination for convenience.