Industrial Concentration, Property Values, and Municipal Bond Spreads

This paper shows that the industrial composition of a city's local economy affects its municipal borrowing costs. In a panel of 1,177 U.S. cities from 2005 to 2022, greater sectoral concentration magnifies default risk and raises bond spreads, especially for cities dominated by industries associated with low property values. Instrumental variables exploiting national sector-employment trends and regional house-price variation support a causal interpretation. A calibrated model of city default suggests that the observed spread effect understates the gross risk created by concentration, because higher concentration can generate agglomeration benefits that reduce spreads, especially for high-property-value cities.