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Jerome Lyle Rappaport

Jerome Lyle Rappaport
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Edward Glaeser

Edward Glaeser
Professor of Economics at Harvard University
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Stephen P. Johnson

Stephen P. Johnson
Executive Director of Phyllis and Jerome Lyle Rappaport Foundation
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Greg Massing

Greg Massing
Executive Director for the Rappaport Center for Law and Public Service
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Alasdair Roberts

Alasdair Roberts
Professor of Law and Public Policy at Suffolk University Law School
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Joseph Curtatone
Mayor, City of Somerville
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Tim H. Davis
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Scott Harshbarger
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Vivien Li
Executive Director of The Boston Harbor Association
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Monika Bandyopadhyay
Suffolk University Law Student

David Barron
Harvard Law School and former Deputy Counsel for the Office of Legal Counsel in the US Department of Justice

Linda Bilmes
Senior lecturer in public policy at the Harvard Kennedy School. Assistant Secretary of Commerce during the Clinton Administration.

Brandy H.M. Brooks
Director, Rudy Bruner Award for Urban Excellence, Bruner Foundation

Felicia Cote
Rappaport Fellow, Harvard Law School/Harvard Kennedy School.

Amanda Eden
Suffolk University Law School student

Sara Farnum
Student, Suffolk Univ. Law School

Kristin Faucette
Student at Suffolk University Law School

Benjamin Forman
Research Director, MassINC

Arthur Hardy-Doubleday
JD/MBA student at Suffolk University Law School and the Sawyer School of Business

Theodore Kalivas
Boston Green Blog, Dukakis Center for Urban & Regional Policy

David Linhart
Student, Boston University School of Law

Antoniya Owens
Research Analyst, Mathematica Policy Research, Inc.

Susan Prosnitz
Senior Advisor, TSA, Washington, DC

Ben Thomas
Boston Green Blog, Dukakis Center for Urban & Regional Policy

Matthew Todaro
Student at Boston College Law School

Alexander von Hoffman
Senior Researcher, Joint Center for Housing Studies

Brett Walker
Student, Boston College Law School

Margarita Warren
Student at Suffolk University Law School

Local Pension Funds Should Invest Farther Afield

Friday, May 6th, 2011
By Edward Glaeser

We all have a local bias. We root for the Patriots, invite our neighbors for dinner, and, if we invest, we bet on US companies. Public pensions have a local bias too: 44.2 percent of private equity investments by public pensions in Massachusetts are placed with funds headquartered in the state.

This is troubling, because those investments have historically earned, on average, 8.62 percent less annually than out-of-state investments, which means that local bias could be costing our pension funds more than $150 million each year.

A striking new paper by Yael Hochberg and Joshua Rauh, two Northwestern University economists, examines the local bias of state and municipal public pensions when they become limited partners in private equity funds, which engage in activities like corporate buyouts or providing venture capital. The economists combined state and municipal funds; in Massachusetts, 36 percent of the private equity investments come from the state.

The economists did not know where the private equity funds themselves were investing, but they did know the funds’ reported returns and the locations of the funds’ headquarters. To calculate the extent of local bias, they compared the percentage of out-of-state public pension investments in each private-equity fund to the percentage of in-state public pensions invested in each.

For example, more than a fifth of the private equity investments for public pension fund investments in Tennessee or Ohio go to private equity funds in those states. Less than one percent of pension fund investments from other states head to either the Buckeye or the Volunteer state.

Massachusetts, according to Hochberg and Rauh, is a national leader in public pension local bias. Our public pension funds place 44 percent of their investments in home-state private equity funds, more than either New York or California. By contrast, only 14 percent of non-Massachusetts public pension investments land in funds headquartered here. One important caveat is that this figure treats all investments equally, no matter the size, because the researchers lacked complete information on investment size. The value-weighted local bias seems lower but is still significant.

Local bias isn’t obviously an investing error. Perhaps pension funds invest locally because they know more about local conditions. Tennessee’s public pension funds may just understand the opportunities offered by local private equity while outsiders stay away out of ignorance.

The alternative view is that public pension bias reflects politics or convenience. Perhaps, politicians pressure pension funds to support local companies. Perhaps, pension funds find it easier or more pleasant to work with nearby private equity fund managers.



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