Hometown Favoritism and Intercity Investment Networks in China

Abstract

In this paper, I study the effects of hometown favoritism on intercity investments in China, or more specifically, whether and how local government officials will bring more investments from their hometown to their workplace. In generalized difference-in-differences specifications, I find that the intercity investments, measured by the total paid-in capital of newly registered firms, increase by about 15%. Further evidence supports the explanation that officials reduce the information asymmetry and thus entry barriers for businesspeople in their hometown, which is incentivized by promotion prospects, rather than that officials and businesspeople form collusive and corruptive deals. Such hometown favoritism is beneficial to productivity and local development. Moreover, I structurally estimate a discrete choice model of firms' location choices, and the estimates also indicate that officials reduce the entry costs for firms from their hometown. The effects of hometown favoritism are amplified in the intercity investment networks.