Public Corruption in the U.S. States and Its Impact on Public Debt Pricing

24 Pages Posted: 12 Apr 2017

See all articles by Tima T. Moldogaziev

Tima T. Moldogaziev

Pennsylvania State University

Cheol Liu

KDI School of Public Policy and Management

Martin Luby

DePaul University

Date Written: May 2017

Abstract

This study evaluates the levels of public corruption in the American states and their impact on the prices of public debt sold by underwriting banks to retail investors. Results suggest that the markups paid by retail investors to underwriters decrease significantly with the incidence of public corruption. The relationship remains significant even when existing anti‐corruption enforcement efforts are taken into consideration. Extant literature shows that the issuers of public debt from relatively more corrupt jurisdictions receive lower prices from underwriting banks in wholesale transactions. We develop and empirically show the mechanism through which this can occur. We offer the first evidence that the public debt market exerts disciplining pressures on the American states with greater levels of public corruption. When purchasing state‐issued public debt, retail buyers appear to demand narrower markups by factoring in public corruption. This, we argue, is an important reason why underwriting banks offer lower prices when dealing with less disciplined fiscal sovereigns.

Suggested Citation

Moldogaziev, Tima T. and Liu, Cheol and Luby, Martin, Public Corruption in the U.S. States and Its Impact on Public Debt Pricing (May 2017). Kyklos, Vol. 70, Issue 2, pp. 306-329, 2017, Available at SSRN: https://ssrn.com/abstract=2950851 or http://dx.doi.org/10.1111/kykl.12139

Tima T. Moldogaziev (Contact Author)

Pennsylvania State University ( email )

324 Pond Lab
School of Public Policy
University Park, PA 16802
United States
16802 (Fax)

Cheol Liu

KDI School of Public Policy and Management ( email )

263 Namsejong-ro
Sejong-si 30149
Korea, Republic of (South Korea)

Martin Luby

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604
United States

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