On Regional Borrowing, Default, and Migration
On Regional Borrowing, Default, and Migration

December 18, 2019

Project Summary

In recent years, cities like Detroit and Flint, Michigan have experienced shrinking populations and an eroding tax base that have strained city budgets. How should cities respond to changes in population and any resulting financial risk? This paper examines the relationship between city finances, migration, and default, using both theoretical models and empirical analysis.

In this research, authors Grey Gordon and Pablo Guerron-Quintana first examine a simple model of city financing. They find that local government leaders are likely to overborrow, especially in municipalities with high levels of incoming migrants. That happens because current residents are likely to benefit from spending today, while future residents will have to pay off the burden of the debt. When cities expect in-migration to continue, they tend to borrow more.

The authors find that defaults occur both in times of low productivity and population decline (as in the case of Detroit and Flint), but also during economic booms (such as in San Bernadino and Stockton, California). Although this may seem counterintuitive, the authors’ model helps explain how cities tend to over-borrow when times are good because they expect future migrants to help repay the debt. When a negative shock eventually occurs, highly leveraged cities may have to default.

The authors then examine the relationship between income, migration, and debt empirically, finding that:

  • inflows of migrants are positively correlated with debt levels,
  • increased debt and expenditures are associated with default,
  • many cities are at or near state-imposed borrowing limits.

Next, the authors introduce their fully-specified theoretical model, which replicates the results of their empirical analysis including the finding that migration tends to result in overborrowing. They also find that private markets constrain municipal borrowing almost as much as state-imposed limits because borrowing is limited by debt and the increasing risk of default.

These findings suggest important connections between borrowing, migration, and default. Policymakers at the city level, as well as the state and country-level, can benefit from a more nuanced understanding of how migration is related to debt and how to best prepare and respond to changes in population.