Can Credit Rating Agencies Affect Election Outcomes?

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We show that credit rating agencies can have a significant effect on election outcomes. Specifically, we find that incumbent politicians in upgraded municipalities experience an increase in their vote shares and likelihood of winning. This incumbent effect is due to an expansion of local governments’ debt capacity that allows them to increase spending. The effects are stronger among Democratic incumbents. We identify these effects by exploiting the exogenous variation in municipal bond ratings due to Moody’s recalibration of its scale in 2010. The effects are consistent with good economic conditions and increases in wealth making voters more lenient toward the incumbent due to attribution errors and reduction in information asymmetry.