Municipal bond insurance and the U.S. drinking water crisis

Agrawal, Ashwini and Kim, Daniel (2021) Municipal bond insurance and the U.S. drinking water crisis. Financial Markets Group Discussion Papers (846). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

We show that the collapse of the municipal bond insurance industry plays an important, but previously overlooked, role in driving regional variation in U.S. drinking water pollution. Public water infrastructure has traditionally been financed using municipal debt partly backed by a small number of monoline insurers. Starting in the 1990's, some - but not all - of these insurers began insuring structured financial products unrelated to water infrastructure. After these products crashed in value in 2007, several bond insurers ceased to insure new debt issues. We show that municipalities that were previously more reliant on relationships with adversely affected insurers subsequently face higher borrowing costs. These municipalities then reduce their borrowing and scale back investments in water infrastructure, leading to increased water pollution. The data suggest that market failures in the municipal bond insurance industry explain 32% of the relative rise in U.S. drinking water pollution since 2007.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2021 The Authors
Divisions:	Finance
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G2 - Financial Institutions and Services > G22 - Insurance; Insurance Companies H - Public Economics > H4 - Publicly Provided Goods > H41 - Public Goods H - Public Economics > H7 - State and Local Government; Intergovernmental Relations > H74 - State and Local Borrowing Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q53 - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
Date Deposited:	23 May 2023 11:06
Last Modified:	16 Sep 2023 00:00
URI:	http://eprints.lse.ac.uk/id/eprint/118888

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