Essays on the Provision and Funding of Public Goods

Past research has largely ignored the effects that political parties have on default risk of state governments. The objective of this paper is to address this policy question using data from Credit Default Swap contracts (CDS), and poll data from state gubernatorial elections. The findings of the paper suggest that state Republican governors have a significant positive effect on CDS spreads. On average, Republican governors reduce credit spreads by around six percent, more than half of CDS standard deviation during election race. Prospects of a Republican administration are good news for debtholders. The positive effect of Republican candidates is larger when: candidates signed the “Taxpayer Protection Pledge”, Democrats control the state houses, and for closely contested gubernatorial elections.