Local Leaders’ Career Horizons and Risk Preference:Evidence from City-Level Regression Analysis

Abstract

Based on agency theory and tournament theory, this study investigates the impact of local leaders’ career horizons on their risk preference. Using the prefectural city-level data from 2006 to 2014, this study finds that local leaders with shorter career horizons are more willing to take the risk of issuing urban investment bonds (UIBs) without discreetly considering local governments’ repayment capacity. It is because they could instantly benefit from the raised capital without bearing the late-emerging side-effects from excessive off-budget governmental liabilities. Furthermore, the disadvantaged position of local leaders in the tournament competition accentuates the career horizon problem, as they perceive their current position to be unfavorable and hence are more likely to pursue risks. Additionally, the career horizon problem is expected to be less pronounced for local leaders with political connections, because political connections offer them a better chance of promotion and hence motivate them to act more safely without taking additional risks.