Corruption and Municipal Finance
40 Pages Posted: 16 Aug 2004 Last revised: 26 Aug 2008
Date Written: November 28, 2004
I examine the effect that state-level public corruption has on municipal financing activities in the United States. Corruption has a strong adverse impact on total bond issuance costs and state debt ratings, but not on individual bonds' ratings. This is because corrupt states are more likely to use institutional means to partially mitigate the negative effects of corruption. Strikingly, the impact that corruption has on issuance costs vanishes for credit-enhanced bonds and for locally underwritten bonds, but not for bonds underwritten by high reputation investment banks. These results are useful for understanding the costs of corruption and how institutions can attenuate corruption's negative effects.
Keywords: Municipal bonds, corruption, certification, bond insurance
JEL Classification: H74, G24, K42
Suggested Citation: Suggested Citation