Suchergebnisse

Recent experience with disasters and terrorist attacks in the US indicates that state and local governments rely on the federal sector for support after disasters occur. But these same governments are responsible for investing in infrastructure designed to reduce vulnerability to natural and man-made hazards. This division of responsibilities - state governments providing protection from disasters and federal government providing insurance against their occurrence - leads to the tension that is at the heart of our analysis. We explore these tensions building on the model of Persson and Tabellini (1996). We show that when the federal government is committed to full insurance against disasters, states will have incentives to underinvest in costly protective measures. We then show that when the central government cannot verify state investment choices, the optimal insurance system would be designed to reward states that succeed in avoiding disasters and punish those that do not, thereby giving states an incentive to increase investment in protective infrastructure. However, this raises the question of whether the central government can credibly commit to such a scheme, and we find in a simple political model that it cannot. In our political model, the central government will decrease transfers ex-post if a state provides protective infrastructure that increases its expected uncertain income, generating a soft-budget constraint for states. This provides an additional incentive for states to underinvest in protective infrastructure. We discuss these results in light of disaster policy in the US.

We estimate the option value of municipal liquidity by studying bond market activity and public sector hiring decisions when government budgets are severely distressed. Using a regression discontinuity (RD) design, we exploit lending eligibility population cutoffs introduced by the federal sector's Municipal Liquidity Facility (MLF) to study the effects of an emergency liquidity option on yields, primary debt issuance, and public sector employment. We find that while the announcement of the liquidity option improved overall municipal bond market functioning, lower-rated issuers additionally benefited from direct access to the facility - their bonds traded at higher prices and were issued more frequently, suggesting a potential credit-risk sharing channel on top of the Fed's role as liquidity-provider of last resort. Local governments, by contrast, responded to emergency liquidity measures by recalling a greater share of service-providing government employees (mostly educational institution workers), but recalls were only sustained for higher-rated municipalities. This hiring responsiveness is consistent with the hypothesis that large government furloughs might have over-weighted the worst possible outcomes based on past experience. Together, the results suggest that municipalities would likely have been more distressed absent the emergency liquidity.

Mortgage modifications have become an important component of public interventions designed to reduce foreclosures. In this paper, we examine how the structure of a mortgage modification affects the likelihood of the modified mortgage re-defaulting over the next year. Using data on subprime modifications that precede the government's Home Affordable Modification Program, we focus our attention on those modifications in which the borrower was seriously delinquent and the monthly payment was reduced as part of the modification. The data indicate that the re-default rate declines with the magnitude of the reduction in the monthly payment, but also that the re-default rate declines relatively more when the payment reduction is achieved through principal forgiveness as opposed to lower interest rates.

Cities are the location of the great majority of economic activity in the United States and produce a disproportionate share of output. It is thus critical for the economy's long-term growth that cities operate efficiently. In this article, the authors review the basic determinants of output growth, with a focus on productivity growth in cities. The authors then explore the effects of a particular distortion in politically fragmented metropolitan areas. After documenting the interdependence of the suburbs and central city of a metropolitan area, the authors develop a model that embodies many of the empirically verified aspects, including agglomeration economies and public goods. After calibrating the model to outcomes for Philadelphia, the authors use it to simulate various policy changes. The authors conclude that, under the model, some kinds of fiscal redistributions can provide benefits in both cities and suburbs.

Recent experience with disasters and terrorist attacks in the US indicates that state and local governments rely on the federal sector for support after disasters occur. But these same governments are responsible for investing in infrastructure designed to reduce vulnerability to natural and man-made hazards. This division of responsibilities – regional governments providing protection from disasters and federal government providing insurance against their occurrence – leads to the tensions that are at the heart of our analysis. We show that when the federal government is committed to full insurance against disasters, regions will have incentives to under-invest in costly protective measures. We derive the structure of the optimal second-best insurance system when regional governments choose investment levels non-cooperatively and the central government cannot verify regional investment choices. Normally (though not always) this will result in lower intergovernmental transfers and greater investment. However, the second-best transfer scheme suffers from a time-inconsistency problem. Ex-post, the central government will be driven towards equalizing rather than the second-best grants, which results in a type of soft budget constraint problem. Sub-national governments will anticipate this and reduce their investment in protective infrastructure even further. We discuss these results in light of recent disaster policy outcomes in the US.