Association for Public Policy Analysis & Management

The paper develops a theory of subnational capital markets that consists of five core fundamental assumptions. It provides a detailed assessment of why these core assumptions are related to an efficient allocation of capital for subnational needs. The paper then offers candidate measures for major variables of interest that scholars can utilize (and have been utilizing) to evaluate how these factors are related to important outcomes of interests such as borrowing costs, liquidity, and credit quality. Finally, the study offers an empirical analysis of the hypothesized associations using subnational capital market issuance data as well as data on fiscal indicators at central and local government levels from a large sample of countries around the world.