Politicians’ municipal bond purchases and local government misallocation: Implications for urban fiscal governance

Abstract

Using financial disclosure reports of U.S. senators and representatives, we examine whether politicians’ municipal bond purchases anticipate subsequent fiscal support and how targeted counties evolve afterward. We find that counties whose municipal bonds are purchased by politicians subsequently receive higher federal funding, consistent with politicians investing in jurisdictions that later benefit from intergovernmental transfers. Secondary-market yields on these bonds decline roughly 4 months after purchase, suggesting that elected officials tend to buy when yields are elevated and benefit from subsequent price adjustments. However, we do not observe corresponding improvements in local real activity: new residential construction and housing prices remain flat, while 90-day mortgage delinquencies and unemployment rise in the post-purchase period. Using an Average Treatment Effect on the Treated/Rubin causal framework, event-time analyses, and placebo and robustness checks, we show that these patterns are not driven by differential pre-trends. Overall, politician bond purchases align with predictable changes in fiscal flows and bond pricing but are not followed by positive local economic spillovers, with implications for urban fiscal governance and the political economy of intergovernmental transfers.