Bond Insurance and Public Sector Employment

Local governments are opaque and, due to asymmetric information, face credit rationing. Bond insurance alleviates this problem by shifting the burden of information production from investors to insurers. The value of bond insurance lies in its ability to grant governments access to the municipal bond market. More opaque governments buy more bond insurance and have more persistent insurance relationships, highlighting the role of information frictions. During the Global Financial Crisis, governments associated with ailing insurers issued less debt, cut expenditures, and hired fewer workers. These effects are concentrated among opaque governments and persisted for many years because these governments remain excluded from the municipal bond market. Partial equilibrium calculations show that affected governments' aggregate expenditures and employment levels in 2017 would have been 6% to 10% higher, if bond insurance had remained available.