Public Expenditures and Racial Disparities: Economic Effects of State Municipal Restructuring Policies

Abstract

We extend and confirm Gao et al (2019)’s result that creditor recovery in municipal restructuring is higher in states that mandate political intervention (Proactive) than in states that allow unconditional access to judicial bankruptcy (Chapter 9). This higher creditor recovery imposes a real economic cost on distressed local communities. Municipalities in Chapter 9 states have higher post-default public expenditures and housing prices than communities in Proactive states. These differences are larger for municipalities with high Black populations, smaller for municipalities that are politically aligned with the state governor, and larger for high Black population communities where there is high racial bias.

Keywords: Default risk, municipal debt, Chapter 9, housing prices, local expenditures, bankruptcy

JEL Classification: G12, G18, H72, H74