Why do Cities Hoard Cash? Determinants and Implications of Municipal Cash Holdings
41 Pages Posted: 6 Jul 2006 Last revised: 17 Jun 2008
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Why do Cities Hoard Cash? Determinants and Implications of Municipal Cash Holdings
Why do Cities Hoard Cash? Determinants and Implications of Municipal Cash Holdings
Date Written: February 2008
Abstract
This paper examines the determinants of municipal cash holdings and the implications of holding high levels of cash. The first part of the analysis investigates municipal manager incentives to accumulate cash as part of normal operations. Results indicate that municipalities with a higher variation in revenues, fewer sources of revenues, and higher growth accumulate more cash. Larger governments and those receiving relatively more state revenue accumulate less cash.
Further analysis considers whether high levels of cash indicate agency problems, and finds municipalities with high cash holdings spend more on administrative expenses, city manager salaries, and bonuses. I find no evidence that municipalities with excess cash return it to citizens by reducing taxes. The presence of staggered councils and councils that are not independent tend to exacerbate excessive cash holdings. These results are consistent with the proposition that governments with high cash levels have agency problems relative to those with lower cash holdings.
Keywords: municipal, local governments, cities, excess cash, governance, efficiency
JEL Classification: M41, M48, G34, H72
Suggested Citation: Suggested Citation
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