Political Bonds: Political Hazards and the Choice of Municipal Financial Instruments

38 Pages Posted: 26 May 2015

See all articles by Abhay Aneja

Abhay Aneja

Stanford University; University of California, Berkeley - Haas School of Business

Marian W. Moszoro

Warsaw School of Economics (SGH); International Monetary Fund (IMF); George Mason University - Department of Economics; George Mason University - Interdisciplinary Center for Economic Science (ICES)

Pablo T. Spiller

University of California, Berkeley - Business & Public Policy Group

Date Written: May 2015

Abstract

We study the link between the choice of rule-based public contracts and political hazards using the municipal bond market. While general obligation bonds are serviced from all municipal revenue streams and offer elected officials financial flexibility, revenue bonds limit the discretion that political agents have in repaying debt as well as the use of revenues from the projects financed by the debt. We predict that public officials choose revenue bonds when elections are very contested to signal trustworthiness and transparency in contracting to the voter. We test this hypothesis on municipal finance data that includes 6,500 bond issuances nationwide as well as election data on over 400 cities over 20 years. We provide evidence that in politically contested cities, mayors are more likely to issue revenue bonds. The correlation is economically significant: a close victory margin of winning candidates and more partisan swings increases the probability of debt being issued as a revenue bond by 3–15% and the probability of issuing bonds through competitive bids by 7%. We test a few additional hypotheses that strengthen the argument that the choice of revenue bonds is a political risk adaptation of public agents so as to signal commitment and lower the likelihood of successful political challenges of misuse of funds.

Suggested Citation

Aneja, Abhay and Moszoro, Marian W. and Spiller, Pablo T., Political Bonds: Political Hazards and the Choice of Municipal Financial Instruments (May 2015). NBER Working Paper No. w21188, Available at SSRN: https://ssrn.com/abstract=2610465

Abhay Aneja (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Marian W. Moszoro

Warsaw School of Economics (SGH) ( email )

aleja Niepodleglosci 162
PL-Warsaw, 02-554
Poland

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

George Mason University - Department of Economics ( email )

4400 University Drive
Fairfax, VA 22030
United States

HOME PAGE: http://economics.gmu.edu/people/mmoszoro

George Mason University - Interdisciplinary Center for Economic Science (ICES) ( email )

400P Truland Building
George Mason University
Fairfax, VA 22030
United States

Pablo T. Spiller

University of California, Berkeley - Business & Public Policy Group ( email )

545 Student Services Building
Berkeley, CA 94720
United States
510-642-1502 (Phone)
510-642-2826 (Fax)

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