Hometown favoritism: Effect of environmental governance of politicians returning home

Abstract

As previous studies demonstrated low effectiveness of formal rules in environmental protection, we explore whether and how informal rules shape environmental governance, thereby adding evidence to behavioral economics. Using data from 2007 to 2015 Chinese listed firms, we employ the difference-in-differences strategy based on shocks of politicians returning home and examine the environmental governance effect of hometown favoritism. We find that politicians who return home improve regional environmental investments only when the environment becomes publicly appealing. This effect is particularly pronounced when public environmental appeal is high. Moreover, government environmental subsidies may be the underlying mechanism for corporate environmental investments. Additionally, we find that the improvement of local environmental quality lasts in the long run. In conclusion, our study reveals the long-term environmental governance effect of informal rules, namely, hometown ties, and provides policy implications that effectively connecting politicians’ incentives to public interests helps provide long-term impetus for regional governance. • We explore whether and how informal rules shape environmental governance. • We use DID strategy based on the shock of politicians returning to their hometown. • Politicians' hometown favoritism can improve local investments in the environment. • Environmental effect is pronounced if public appeal for the environment is strong. • Hometown favoritism closely links politicians' incentive with local public appeal.