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American Law and Economics Review Advance Access published online on October 20, 2009
American Law and Economics Review, doi:10.1093/aler/ahp013
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© The Author 2009. Published by Oxford University Press on behalf of the American Law and Economics Association. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org

Municipal Bond Ratings and Citizens’ Rights

John Yinger

Maxwell School, Syracuse University

Send correspondence to: John Yinger, Trustee Professor of Public Administration and Economics at the Maxwell School, Syracuse University, 426 Eggers Hall, Syracuse, NY 13244, USA; E-mail: jyinger{at}maxwell.syr.edu.

JEL Classification: G24, H74


  Abstract

Municipal bond ratings give investors information about bonds’ default probabilities. They also affect societal objectives by altering the cost of public infrastructure but are not regulated. This paper explores the possibility that these ratings involve behavior analogous to redlining, which is discrimination against people in places with a high minority composition. Drawing on our civil rights laws, the paper develops a regulatory framework to balance societal objectives with a rating agency's business interests. An application to the ratings of cities’ general obligation bonds finds evidence suggesting redlining-type behavior. This analysis supports the need for regulation of municipal bond ratings.

The author is grateful for helpful comments from Mark Robbins, Ross Rubenstein, Bill Simonsen, Larry White, Coady Wing, and Ryan Yeung.


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