Municipal bond investors and bureaucrats: an analysis of economic and political incentives

A municipal bond market model and a capital spending model are developed to examine bond investor and bureaucratic incentives, respectively. Public choice and municipal finance form the basis for model development, which suggest that these two groups have both common and conflicting incentives. Regression results indicate the importance of economic factors, bond ratings, and outstanding debt as important issuer specific factors in determining interest costs. However, none of the financial nor auditing variables was significant. Capital spending can be partially explained by bureaucratic power, financial monitoring (including bond ratings), and key financial ratios. Bond market factors were not significant. These results provide weak support for the proposition that investors and bureaucrats have some common incentives associated with economic and financial factors.