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The impact of state intervention and bankruptcy authorization laws on local government deficits

Author

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  • Lang Yang

    (George Washington University)

Abstract

Local governments in the United States can file for bankruptcy to restructure their debt if allowed by state laws. While some states legislate an unconditional authorization, others conditionally permit local filings, do not give authorization, or intervene in local crises. This paper investigates the impact of state policy adoption on local governments’ revenue to expense ratio, a measure of deficit. While bankruptcy authorizations do not show an impact at the mean, a median locality decreases the revenue–expense ratio after the state adopts an authorization unconditional on state intervention, suggesting a moral hazard effect. Localities with conditionally high deficits, however, increase the ratio upon the adoption of a conditional authorization, possibly because they want to avoid being subjective to conditions placed by states.

Suggested Citation

  • Lang Yang, 2019. "The impact of state intervention and bankruptcy authorization laws on local government deficits," Economics of Governance, Springer, vol. 20(4), pages 305-328, December.
    • Handle: RePEc:spr:ecogov:v:20:y:2019:i:4:d:10.1007_s10101-019-00222-6
    DOI: 10.1007/s10101-019-00222-6
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    References listed on IDEAS

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    More about this item

    Keywords

    Fiscal rules; Fiscal federalism; Municipal bankruptcy; Fiscal sustainability;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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