Campaign Contributions and Government Financial Management: Evidence from State Bond Pricing

Abstract:     
This paper studies campaign-finance agency costs related to pricing in the $3 trillion state and local-government bond market. There is no underpricing cost from choosing a contributing underwriter through an auction. Otherwise, bonds are underpriced by 4% when a contributing underwriter is selected naively. The government’s propensity to choose a contributing underwriter decreases as expected underpricing increases. These results remain robust after many checks. State-law quality and near-election timing reduce underpricing and the number of cases where a contributing underwriter is chosen. Hence effective laws, auctions, education, and elections, can mitigate campaign-finance agency costs and improve government financial management.

Number of Pages in PDF File: 72

Keywords: Campaign Contributions, Public Finance, Securities Issuance, Government Financial Management, Financial Education, Underpricing, Law, Elections

JEL Classification: H74, P16, G24

working papers series