A Rational Partisan Explanation for Irrational (Sub) Sovereign Debt Behavior: Evidence from Municipal Mexico

If investors and governments are rational, then governments with similar macro-economic characteristics should exhibit similarly balanced debt portfolios among financing instruments. Yet, anecdotal evidence suggests this is not always the case. Building on rational partisan theory, we argue that left-leaning governments tolerating fiscal deficits not only contract greater public debt loads but also construct debt portfolios balanced toward instruments with less cost-efficient terms. In contrast, right-leaning governments favoring balanced budgets assume lower public debt as well as debt portfolios balanced toward more cost-efficient instruments. Statistical analysis of Mexican municipal debt reveals the presence of partisan ideological effects.