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

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.