The Employment Effect of Municipal Credit Market Disruptions: Evidence from Idiosyncratic Bankruptcy Filings

Joint project with Lisa Knauer

Paper available upon request

Abstract:

We show that credit supply shocks to municipalities have a negative effect on non-tradable employment. For identification, we exploit idiosyncratic bankruptcy filings as a disruption of a state’s municipal debt market and ex-ante variation in counties’ maturity of long-term debt as exposure to a credit supply shock. The employment effect is not driven by size or leverage-specific development of counties or a direct demand spillover of the bankrupt municipality to other counties. We also find no evidence for propagation of the bankruptcy through banks or firm networks. Consistent with a tightened credit supply to municipalities, we document a decline in operating expenditures of treated counties.