Citizens versus Bondholders

Abstract:     
This Essay, written for a colloquium considering the effects of the recent financial crisis on local governments, asks whether bondholders or citizens are better monitors of municipal fiscal behavior and who should be charged with the risk of municipal default when cities experience financial distress. Should citizens feel the fiscal pain through tax hikes and service cuts or should bondholders suffer losses? This Essay argues that bondholders should be charged with the risk of municipal default, not because they are better monitors of local fiscal behavior, but because they are better bearers of financial risk. The Essay further considers whether this allocation of risk can help prevent municipal fiscal stress before it occurs and what the recent history of municipal defaults tells us about the politics of local fiscal crises. The Essay concludes by offering reasons for why municipalities have such low default rates as compared to their private-side counterparts.

Number of Pages in PDF File: 18

Keywords: municipal default, bankruptcy, cities, bondholders, local government, local economic development

Accepted Paper Series