Abstract
We analyze the political determinants of municipal bankruptcy law. Our model predicts municipal-bankruptcy-law adoption should drive lower municipalities’ borrowing costs and higher municipal-bond-financed private investment. Ex-ante, weaker labor unions, stronger bondholders’ interests, and more effective courts should drive a higher likelihood of municipal bankruptcy law adoption. In our model, financial reform destroys union rents and fosters investment opportunities. These predictions are broadly consistent with extant evidence.
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