Public Sector Corruption in the U.S. States and Municipal Debt Finance: Do Local Governments Pay a Corruption Premium?
20 Pages Posted: 30 Jan 2018
Date Written: June 25, 2015
This paper demonstrates that capital markets take surrounding environments in the states into consideration when determining prices on local debt, above and beyond the underlying features of municipal bonds. We empirically show that corruption premium exists in the US municipal bond market. Local governments in more corrupt states pay higher costs for long-term borrowing in the market. Moreover, fiscal institutions that are traditionally thought to bring fiscal discipline to local governments become ineffective in the states with relatively higher levels of public sector corruption.
Keywords: public corruption; municipal debt market; borrowing cost
JEL Classification: D73, G23, H74
Suggested Citation: Suggested Citation