Working Paper: NBER ID: w21188
Authors: Abhay Aneja; Marian Moszoro; Pablo T. Spiller
Abstract: We study the link between the choice of rule-based public contracts and political hazards using the municipal bond market. While general obligation bonds are serviced from all municipal revenue streams and offer elected officials financial flexibility, revenue bonds limit the discretion that political agents have in repaying debt as well as the use of revenues from the projects financed by the debt. We predict that public officials choose revenue bonds when elections are very contested to signal trustworthiness and transparency in contracting to the voter. We test this hypothesis on municipal finance data that includes 6,500 bond issuances nationwide as well as election data on over 400 cities over 20 years. We provide evidence that in politically contested cities, mayors are more likely to issue revenue bonds. The correlation is economically significant: a close victory margin of winning candidates and more partisan swings increases the probability of debt being issued as a revenue bond by 3–15% and the probability of issuing bonds through competitive bids by 7%. We test a few additional hypotheses that strengthen the argument that the choice of revenue bonds is a political risk adaptation of public agents so as to signal commitment and lower the likelihood of successful political challenges of misuse of funds.
Keywords: Municipal bonds; Political hazards; Public contracts; Revenue bonds; General obligation bonds
JEL Codes: D23; D73; D78; H57; K23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| political contestability (D72) | type of bonds issued (G12) |
| close victory margin in elections (K16) | probability of issuing revenue bonds (H74) |
| close victory margin in elections (K16) | probability of issuing bonds through competitive bids (G12) |
| type of bonds issued (G12) | trustworthiness and transparency (G38) |
| time in mayor's term (C41) | likelihood of issuing revenue bonds (H74) |