Economics of Governance

, Volume 17, Issue 2, pp 185–209 | Cite as

Do fiscal constraints prevent default? Historical evidence from U.S. municipalities

Original Paper

Abstract

Through the nineteenth century numerous U.S. states developed extensive municipal fiscal constitutions. These generally came in the wake of financial crises and large-scale default of public debts. Although the constraints were imposed in order to minimize the likelihood that such outcomes would occur in the future, little work has been undertaken to analyze whether they were successful in achieving that goal. Therefore, this current study attempts to do so by empirically investigating how procedural safeguards and outright prohibitions on debt accumulation, along with hard budget constraints, and tax limits impacted the likelihood of default. This is done by evaluating municipal defaults that centered on the Panic of 1893. Overall, the results suggest that outright prohibitions on debt accumulation and hard budget constraints actually reduced the likelihood of municipal default across states, while tax limits and procedural safeguards increased that likelihood.

Keywords

Default Sovereign debt Fiscal constraints Panic of 1893 Credible commitments 

JEL Classification

D78 H73 H74 N21 N41 

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Copyright information

© Springer-Verlag Berlin Heidelberg 2015

Authors and Affiliations

  1. 1.Manuel H. Johnson Center for Political EconomyTroy UniversityTroyUSA

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