On Regional Borrowing, Default, and Migration (Revised March 2023)

How do local government borrowing, default, and migration interact? We find in-migration results in excessive debt accumulation due to a key externality: Immigrants help repay previously issued debt. In addition to providing direct IV evidence on this mechanism, we show cities are heavily indebted, near state-imposed borrowing limits, vulnerable to interest rate increases, and default even after periods of robust population and productivity growth. Our quantitative model reproduces these features of the data and reveals a bifurcation: in-migration strongly affects borrowing, but borrowing only weakly affects migration. The model predicts large interest rate declines in the Great Recession prevented a wave of municipal defaults.