Introduction

In our recent study published in the Journal of Management Studies, we delve into the intriguing question of whether appointed politicians show favoritism toward firms from their hometowns when distributing scarce economic resources. We further examine how the strength of a politician’s birthplace identity influences this favoritism and the broader implications it has on societal resource allocation efficiency. By integrating a social identity perspective, our study expands the nonmarket strategy literature, shedding light on the complex dynamics between political power, firm outcomes, and societal resource distribution.

Why Does This Matter?

Politicians often favor their birthplaces when allocating economic resources, such as public goods or federal funds, a phenomenon well-documented in electoral contexts. This bias is typically linked to self-interest, like securing hometown votes. However, in political systems where politicians are appointed rather than elected, the mechanisms driving hometown favoritism are less understood. Our study addresses this gap by exploring how birthplace identity, rather than electoral incentives, drives resource allocation in China’s non-electoral political landscape, particularly in the context of IPO capital distribution.

Our Approach

In China, the approval of initial public offerings (IPOs) is a tightly controlled process, making IPO capital a scarce and highly sought-after resource. We leverage the turnover of politicians overseeing the nationwide IPO approval process and the resulting “birthplace shock” to isolate the causal effects of hometown favoritism. This approach allows us to observe how politicians’ connections to their birthplaces influence the allocation of IPO capital and the efficiency of this process.

Key Findings

Our findings reveal that politicians favor firms from their hometowns, resulting in a higher likelihood of IPO approval for these firms. Hometown firms are on average 15 percentage points more likely to receive IPO approval. This favoritism is particularly pronounced when politicians have a strong sense of birthplace identity. However, this hometown favoritism comes at a cost: it distorts the allocation efficiency of scarce capital resources.

Implications for Scholars

Our study makes significant contributions to the nonmarket strategy literature by highlighting the role of social identity—specifically birthplace identity—in political decision-making. While existing research has largely focused on electoral motivations behind political favoritism, our work demonstrates that social identity can be a powerful driver of decision-making even in non-electoral contexts.

Moreover, we extend the social identity literature by exploring mechanisms such as the distinctiveness of birthplace values, the awareness of out-groups, and in-group collective self-esteem. These factors intensify politicians’ hometown favoritism, offering a deeper understanding of how social identity influences societal resource allocation—a topic that has received limited attention in prior research.

Relevance to Practitioners

Our findings suggest that birthplace identity plays a crucial role in political decision-making, indicating that favoritism can arise from inherent social identity biases, not just self-interest or electoral considerations. This hometown favoritism can lead to inefficient resource allocation, potentially impeding economic growth and innovation. For policymakers, these insights are crucial for developing strategies to counteract the adverse effects of political favoritism and to foster a more equitable and efficient distribution of economic resources within society.

To mitigate these effects, policymakers could implement several strategies. First, enhancing transparency in the decision-making process could help reduce biases and hold politicians accountable. Second, introducing independent oversight bodies to review and audit major economic decisions, particularly those involving significant resource allocation, can serve as a check against favoritism. Third, promoting diversity in political appointments by ensuring that decision-makers represent a broad spectrum of social identities may dilute the impact of any single bias. Finally, investing in training programs that educate politicians and public officials about the unconscious biases associated with social identity and their potential consequences could help raise awareness and reduce the likelihood of such biases influencing decisions.

Conclusion

Our study sheds light on the often-overlooked role of social identity in political decision-making, particularly in non-electoral systems. By understanding how birthplace identity influences politicians, we can better address the challenges of economic resource allocation and work toward a more equitable distribution of society’s scarce economic resources.