Do Markets Reward Constitutional Reform? Lessons from America’s State Debt Crisis

America's 1840s state debt crisis presents a unique opportunity to identify whether the adoption of self-imposed fiscal constraints lowers sovereign borrowing costs. After nine states defaulted, 20 states adopted constitutional provisions that constrained the legislature’s ability to issue debt. The process of reform generates variation in the timing of these reforms. Exploiting this variation, I find that only states with tarnished reputations (i.e. states that defaulted during the crisis) were rewarded with lower borrowing costs following the adoption of these reforms. This suggests that institutional constraints can help sovereigns reestablish their commitment to debt repayment.