Essays on the Provision and Funding of Public Goods
2014-05-01T00:00:00Z (GMT) by
The first essay studies how political parties’ choice of public good provision and tax funding affect the risk of default to public debt investors. Past research has largely ignored the effects that political parties have on default risk of state governments. The objective of this paper is to address this policy question using data from Credit Default Swap contracts (CDS), and poll data from state gubernatorial elections. The findings of the paper suggest that state Republican governors have a significant positive effect on CDS spreads. On average, Republican governors reduce credit spreads by around six percent, more than half of CDS standard deviation during election race. Prospects of a Republican administration are good news for debtholders. The positive effect of Republican candidates is larger when: candidates signed the ``Taxpayer Protection Pledge'', Democrats control the state houses and for highly contested gubernatorial elections. The second essay studies profiling and affirmative action in the access to gifted programs, a common public good provided by school districts. For decades, colleges and universities have struggled to increase participation of minority and disadvantaged students. Urban school districts confront a parallel challenge; minority and disadvantaged students are underrepresented in selective programs that use merit-based admission. We analyze optimal school district policy and develop an econometric framework providing a unified treatment of affirmative action and profiling. Implementing the model for a central-city district, we find profiling by race and income, affirmative action for low-income students, and no affirmative action with respect race. Counterfactual analysis reveals that these policies achieve 80\% of African American enrollment that would be could be attained by race-based affirmative action. The third essay studies a new alternative mean of funding for States and local authorities called Build America Bonds (BAB). BABs were issued by municipalities for twenty months as part of the 2009 fiscal package. Unlike traditional tax-exempt municipals, BABs are taxable to the holder, but the Treasury rebates 35% of the coupon to the issuer. The stated purpose was to provide municipalities access to a more liquid market including foreign, tax-exempt, and tax-deferred investors. We find BABs do not exhibit greater liquidity than traditional municipals. BABs are more underpriced initially, particularly for interdealer trades. BABs also show a substitution from underwriter fees toward more underpricing, suggesting the underpricing is a strategic response to the tax subsidy.