Municipal Bond Ratings and Citizens’ Rights

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.

© Oxford University Press 2009