Municipal Bond Insurance and the U.S. Drinking Water Crisis

62 Pages Posted: 29 Mar 2021 Last revised: 7 Jul 2021

See all articles by Ashwini K. Agrawal

Ashwini K. Agrawal

London School of Economics & Political Science (LSE)

Daniel Kim

BI Norwegian Business School

Date Written: July 6, 2021

Abstract

The alarming rise in drinking water pollution across the U.S. is often attributed to cost cutting pressures faced by local officials. We know little, however, about why these pressures are so severe for some cities compared to others. We present a new theory to argue that an important contributor to recent drinking water emergencies is the collapse of the municipal bond insurance industry. Public water infrastructure has traditionally been financed using municipal debt partly backed by a small number of monoline insurers. Starting in the 90’s, some of these insurers became increasingly involved with structured financial products unrelated to municipal water bonds, such as residential mortgage backed securities. We show that when these products crashed in value in 2007, municipalities that had relied more heavily on these insurers for water infrastructure financing subsequently faced higher borrowing costs. These municipalities then reduced their borrowing and scaled back investments in water infrastructure, which in turn, has led to elevated levels of water contamination. Our findings thus reveal how the U.S drinking water crisis can be partly traced back to financial market failures.

Keywords: Municipal Finance, Insurance, Investment, Public Goods, Drinking Water, Infrastructure

JEL Classification: H00, G00, H40, H74, G18, G30

Suggested Citation

Agrawal, Ashwini K. and Kim, Daniel, Municipal Bond Insurance and the U.S. Drinking Water Crisis (July 6, 2021). Available at SSRN: https://ssrn.com/abstract=3813348 or http://dx.doi.org/10.2139/ssrn.3813348

Ashwini K. Agrawal (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Daniel Kim

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0484
Norway

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