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. 2022 Jun:47:102781.
doi: 10.1016/j.frl.2022.102781. Epub 2022 Mar 7.

The price of political polarization: Evidence from municipal issuers during the coronavirus pandemic

Zhiwei Chen  1 , Zhaoyuan Li  2 , Sibo Liu  3
Affiliations

The price of political polarization: Evidence from municipal issuers during the coronavirus pandemic

Zhiwei Chen et al. Financ Res Lett. 2022 Jun.

Abstract

This study estimates the financial costs imposed by political polarization among citizens on U.S. local governments during the COVID-19 pandemic. We measure local political polarization by using citizens' voting results in the presidential elections. We find local political polarization leads to higher offering yield of the bonds issued by the U.S. municipalities. The impact on borrowing costs is exaggerated by the number of pandemic cases in the local area, suggesting political polarization hinders the making and enforcement of government measures for the pandemic. This study highlights the mechanisms through which financial markets and local political ideology jointly affect social welfare.

Keywords: Government financing; Municipal bonds; Pandemic; Political polarization.

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Conflict of interest statement

The authors have nothing to disclose.

Figures

Fig. 1
Fig. 1
Histogram of Political Polarization This figure shows the distribution of political polarization. Polarization is the degree of political polarization in the county. Polarization = 1 − |DemVoteShare − RepVoteShare|, where DemVoteShare means the vote share of the Democratic Party and RepVoteShare means the vote share of the Republican Party.
Fig. 2
Fig. 2
Pandemic Cases and Political Polarization of Counties Panel A shows the degree of political polarization of each county. Darker bars indicate higher degree of political polarization in the county while lighter ones indicate lower degree of political polarization. Panel B shows the number of COVID-19 patients of each county in 2021–04–01. Darker bars indicate more COVID-19 patients in the county, while lighter ones indicate less COVID-19 patients.
Fig. 3
Fig. 3
Political Polarization and Municipal Bond Yield This figure shows the relationship between political polarization and municipal bond yield. Yield is the logarithm of the offering yield on the bond. Polarization is the degree of political polarization in the county. Polarization = 1 − |DemVoteShare − RepVoteShare|, where DemVoteShare means the vote share of the Democratic Party and RepVoteShare means the vote share of the Republican Party. the sample is divided into ten groups by sorted Polarization. Each dot indicates the average yield of the group and each interval line indicates the 95% confidence interval. The fitting line indicates the linear relation between Yield and Polarization.
Fig. 4
Fig. 4
Political Polarization and Pandemic Cases This figure shows the relationship between political polarization and pandemic cases. Cases_new is the logarithm of the number of new COVID-19 patients in a county in a month (plus 1, to deal with counties and months with zero new patients). Polarization is the degree of political polarization in the county. Polarization = 1 − |DemVoteShare − RepVoteShare|, where DemVoteShare means the vote share of the Democratic Party and RepVoteShare means the vote share of the Republican Party. The sample is divided into ten groups by sorted Polarization. Each dot indicates the average new COVID-19 patients of the group and each interval line indicates the 95% confidence interval. The fitting line indicates the linear relation between Cases_new and Polarization.
See this image and copyright information in PMC

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