Municipal Bonds as Leverage for Negotiation and Improving Operational Efficiency

Abstract

This article examines how the use of bonds to finance municipal activities affects the efficiency of municipalities. We posit that the sale of municipal bonds affects cities directly by reducing their financing expenses and indirectly by improving their operational efficiency. To investigate this hypothesis, we use case studies of four municipalities in Israel. Our main results show that the introduction of bonds as an option for financing municipalities has a lasting effect on the cities’ bargaining power with the banks, even if the issuance is not repeated again. Other municipalities that have not issued bonds also benefit from the leverage that this possibility offers them when negotiating with the banks. Furthermore, we find that the use of bonds improves the operational efficiency of municipalities significantly.