Home Bias in U.S. Politics

53 Pages Posted: 13 Feb 2018 Last revised: 1 Apr 2019

See all articles by Changhyun Ahn

Changhyun Ahn

University of Florida - Department of Finance, Insurance and Real Estate

Jae Yung Kim

Tulane University - A.B. Freeman School of Business

Jongsub Lee

University of Florida - Warrington College of Business Administration

Date Written: March 31, 2019

Abstract

Politicians preferentially treat firms in their electoral districts. We develop a model of home bias, which shows that a politician with limited political capacity grants a favor to local firms over non-local firms to satisfy voters and induce (re-)elections. We identify domestic firms that run business in politicians' constituency as local firms, while foreign firms with little economic exposure in the constituency as non-local firms. Using 1% close congressional elections from 1997 to 2014, we find that a narrow victory of connected politicians results in a 17 to 23 percent increase in value for local firms, whereas only a 4 to 12 percent increase in value for foreign firms. The results are evident when connected politicians are house representatives, who run elections in economically distressed states with high corruptions during the post-2007 financial crisis period. Our results are robust to controlling for heterogeneous U.S. economic exposures of foreign firms.

Keywords: Close congressional elections, local voters and politicians, campaign contributions, home biases, foreign value discount

JEL Classification: D72, G28, G32

Suggested Citation

Ahn, Changhyun and Kim, Jae Yung and Lee, Jongsub, Home Bias in U.S. Politics (March 31, 2019). Available at SSRN: https://ssrn.com/abstract=3120024 or http://dx.doi.org/10.2139/ssrn.3120024

Changhyun Ahn (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

Jae Yung Kim

Tulane University - A.B. Freeman School of Business

7 McAlister Drive
New Orleans, LA 70118
United States

Jongsub Lee

University of Florida - Warrington College of Business Administration ( email )

Department of Finance Insurance & Real Estate
P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-273-4966 (Phone)
352-392-0301 (Fax)

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