Home Bias in U.S. Politics

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