Uncharted Waters: Pollution and Municipal Finance
53 Pages Posted: 20 Apr 2021 Last revised: 14 Sep 2021
Date Written: March 1, 2021
We show that pollution increases the offering yields of municipal bonds, indicating increased risk. We establish this using a difference-in-differences design, comparing the bonds from U.S. counties revealed to contain per- and poly-fluoroalkyl substances (PFAS) in their drinking-water supplies with the bonds from neighboring, unpolluted, same-state counties. The increase was greater for riskier bonds characterized by repayment obligation, ex-ante debt burden, unrated issuance, maturity, and bankruptcy access. The resulting pollution-related investment needs and a reduction in public sector employment and expenditure likely underlie the risk. An instrumental variable-like method utilizing airports as a potential contamination source reaffirms the causal interpretation.
Keywords: Municipal Bonds, Drinking Water Pollution, PFAS, Forever Chemicals.
JEL Classification: G14, H72, H74, Q53, Q58.
Suggested Citation: Suggested Citation