Financing Public Goods

Abstract

I study whether and how shocks to the supply of municipal credit affect both the quantity and quality of local public goods. I use a difference-in-differences approach based on regulations that affected bank demand for municipal bonds. Credit-constrained municipalities cut spending, especially infrastructure investment. Public service quality deteriorates, manifested in increased water contamination and prolonged power outages. While amendments to the regulation mitigated municipal credit constraints, evidence is mixed on whether the quality of public service recovered. My results highlight the impact of financial market disruptions on local governments and people, and the unintended consequences of a post-crisis banking regulation.