Institutional Aspects and Fiscal Outcomes of U.S. Municipal Governance




Rundle, Jonathan

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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.



Municipal, Local, Institutions, TELs, Debt