On Regional Borrowing, Migration, and Default

Migration plays a key roll in city finances with every new entrant reducing debt per person and every exit increasing it. We study the interactions between regional borrowing, migration, and default from empirical, theoretical, and quantitative perspectives. Empirically, we document that intercity migration rates are high in the U.S. (exceeding 6%), in-migration rates are negatively correlated with deficits, and many cities appear to be at or near state-imposed borrowing limits. Additionally, we show defaults can occur after booms or busts in labor productivity and population. Our quantitative model is able to rationalize these features of the data in large part because of a key externality that induces over-borrowing. Counterfactuals in the model reveal (1) Detroit should have slashed spending and raised taxes in 2008 to avoid default; (2) migration is overwhelmingly positive for the economy, boosting GDP by 18% or more and reducing income inequality; (3) a return to the high-interest rate environment prevailing in the 1990s could double default rates; and (4) halving the dispersion of geographic-specific productivity---which we document occurred from 1986 to 2000---can potentially account for all of the secular decline in migration rates from 1991 to 2011. This last finding provides additional support for the mechanism proposed in Kaplan and Schulhofer-Wohl (2017).