Emphasizing on Municipal Bonds as Leverage for Negotiation and Improving Operational Efficiency

This article examines how the use of bonds to finance municipal activities affects the efficiency of
municipalities. Local authorities compete to attract new residents, enabling these residents to
influence the services and finances that the local government supplies. 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. This article has shown that the main
advantage of a bond issue is the long term improvement in the managerial and financial conduct of
the municipalities.