We analyze the political determinants of municipal bankruptcy law. Our model predicts municipal-bankruptcy-law adoption should drive lower municipalities’ borrowing costs and higher municipal-bond-financed private investment. Ex-ante, weaker labor unions, stronger bondholders’ interests, and more effective courts should drive a higher likelihood of municipal bankruptcy law adoption. In our model, financial reform destroys union rents and fosters investment opportunities. These predictions are broadly consistent with extant evidence.
The political economy of municipal bankruptcy
Rossi, Stefano
;
2024
Abstract
We analyze the political determinants of municipal bankruptcy law. Our model predicts municipal-bankruptcy-law adoption should drive lower municipalities’ borrowing costs and higher municipal-bond-financed private investment. Ex-ante, weaker labor unions, stronger bondholders’ interests, and more effective courts should drive a higher likelihood of municipal bankruptcy law adoption. In our model, financial reform destroys union rents and fosters investment opportunities. These predictions are broadly consistent with extant evidence.
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