Public Bond Issuance and Persistent Inequality

Dr.Weiling Liu, Northeastern University

We find that less wealthy school districts have more difficulty borrowing money through municipal bond markets, perpetuating education inequality. When school districts issue municipal bonds to finance education infrastructure, we find that it leads to higher test scores and home prices. Despite these tangible benefits, voters in less wealthy school districts are significantly less likely to approve bond issuance. In addition, even controlling for bond characteristics including credit quality, less wealthy school districts pay significantly higher bond yields and issuance fees. Investigating constraints that disproportionately impact these districts, we find three complementary explanations for the observed higher costs: property tax constraints, marketability, and urgency of funding. First, less wealthy districts can offset property tax constraints by delaying debt payments, so they are more likely to issue zero-coupon bonds and bonds with longer maturities, which have higher yields. Second, less wealthy districts are more likely to pay extra for credit guarantees and choose negotiated over competitive offerings to increase the marketability of their bonds. Third, we find that less wealthy districts issue bonds more quickly after authorization, choosing timeliness over a cheaper, more favorable interest rate environment. Overall, these bond choices help less wealthy school districts pass the debt they need for infrastructure repairs, but they ultimately come at the tradeoff of higher costs.

Bio:
Weiling is an assistant professor of finance at the D’Amore-McKim School of Business at Northeastern University. Currently, her research interests are consumer finance and financial intermediation. She is interested in understanding how market frictions ultimately impact consumers by constraining large financial intermediaries, such as insurance companies and banks.She received a PhD in business economics from Harvard University and earned a Bachelor's degree in economics and statistics from the University of Chicago. Prior to the PhD, she worked for 2 years as a research analyst at the Federal Reserve Bank of New York.