Municipal Bond Insurance and Public Infrastructure: Evidence from Drinking Water

Abstract

Bond insurers are intermediaries that are often relied upon by local governments for external financing. There is significant debate, however, about their impact on public infrastructure. In this paper, we study U.S. drinking water, and show that exogenous reductions in municipalities' access to bond insurance cause local governments to face higher borrowing costs, reduce external bond issuance, decrease investment in water infrastructure, and experience greater drinking water pollution. The evidence supports the view that well-functioning insurance markets for municipal debt have significant real effects on public infrastructure and environmental outcomes.

Keywords: Municipal Finance, Insurance, Investment, Public Goods, Drinking Water, Infrastructure, ESG

JEL Classification: G22, H41, H74, Q53, Q01, M14