Abstract:
A large body of literature suggests that institutional arrangements for collective political
decisions are not simply “veils”, but exert a real influence on the particular policies that
emerge. This thesis is a compilation of three essays exploring various institutional
aspects of governance at the municipal level in the United States. Each essay empirically
tests whether those institutions have implications for public fiscal outcomes.
The first essay attempts to investigate whether, and if so how, financial markets assess
institutional arrangements where the policy outcomes will bear directly on the valuation
of financial securities. A model of interest rate determination for municipal bond issues
is presented and tested using market data from bond issues to assess whether formal debt
limitations, tax limitations, and expenditure limitations affect municipal market
participants’ credit evaluations of the issuing governments. The empirical results suggest
that tax limits in particular increase borrowing costs to local governments by
approximately 5 to 8 basis points.
The second essay tests whether increased jurisdictional competition in the local provision
of publicly financed goods results in lower per capita debt levels. The empirical results
find evidence that in U.S. metropolitan counties, increased jurisdictional fragmentation
lowers all non-school related local government debt burdens, particularly non-guaranteed
debt.
The final essay considers political institutions in large U.S. cities, and whether
partisanship at the local level can impact fiscal outcomes. Specifically, the essay tests
whether local politicians engage in the strategic use of debt. Two different models of the
strategic use of debt are tested by considering mayoral election prospects and
corresponding city per capita debt levels. The results do not support the hypothesis that
this type of political behavior is a significant determinant of large U.S. city debt levels.
The essay conjectures that other institutions such as strong Tiebout competition or
majoritarian electoral systems may mute or prevent partisanship behavior such as the
strategic use of debt.
