ABSTRACT We investigate the impact of gubernatorial re‐election incentive and political factors on US public pension funds from 1990 to 2022. Our empirical analysis finds no significant overall relationship between gubernatorial re‐election incentives and local bias in the full sample. However, the effect of gubernatorial re‐election incentives on local bias is influenced by a state's level of corruption. Specifically, in states within the lowest corruption quantile, governors eligible for re‐election tend to prioritize local investments to gain consistent support. In contrast, in states within the highest corruption quantile, heightened scrutiny may encourage re‐election‐eligible governors to adopt conservative investment policies that do not significantly influence local bias. Although re‐election incentives may encourage politically motivated local investments in low‐corruption states, they do not necessarily lead to negative outcomes. Instead, in these states, governors seeking re‐election appear to positively influence pension fund performance and investment expenses, suggesting that electoral accountability may help align political incentives with prudent investment management. Additionally, we find that a change in the state governor's party affiliation is negatively associated with local bias, and Democratic governors appear to mitigate the impact of re‐election incentives on local investment across both high‐ and low‐corruption states. Other political variables do not exhibit statistically significant relationships with local bias.
Zhang et al. (Wed,) studied this question.