June 1, 2013

Insolvency Without a Capital Account: The Weak Foundations of Municipal Bankruptcy

  • Richard Wagner

    Distinguished Senior Fellow, F. A. Hayek Program for Advanced Study in Philosophy, Politics and Economics
  • Lotta Moberg

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Read the full paper on SSRN.com 

It is understandably easy to look at municipal bankruptcy through the same analytical lens that one uses in thinking about bankruptcy by commercial corporations. Cities, after all, are corporate bodies that continue to exist despite the ever changing identities of the residents. They are even commonly designated as municipal corporations, suggesting an affinity between commercial and municipal corporations that would offer a bridge between commercial and municipal bankruptcy. We explain why, despite this affinity, this bridge cannot truly be built, at least not without transforming the effective capital accounts of these political entities. There are significant institutional and organizational differences between the two forms of corporation. These differences render dubious the extension of bankruptcy concepts and procedures from commercial to municipal corporations.