This paper studies how the racial and ethnic demographic composition of U.S. municipalities is priced in the municipal bonds market. It leverages high-frequency financial data on the universe of municipal bonds issued between 2004 and 2019. More diverse cities pay higher costs on their debt: up to +10 basis points of yield-spread (+6%) per standard deviation increase of Black and Latino population shares, equivalent to +3.8% in total interest costs for the average bond. This holds controlling for maturity structure and credit ratings. Causal estimates of this diversity premium are based on a novel implementation of shift-share instruments for Black and Latino population shares. The effect is not driven by income, population trends, municipal revenues, amount of outstanding debt, or tax capacity of the issuers. The results are consistent with the discrimination of racial and ethnic minorities in the primary market for municipal bonds. Discrimination is not present in credit ratings and does not occur because of the underwriters involved in the issuance process. This evidence carries important implications for our understanding of public investments and the provision of public goods in local governments.

Disproportionality in the representation and in the voter registration rates of Minority groups in the United States is widespread, but stronger when racial or ethnic minorities are electorally pivotal. We define this phenomenon strategic underrepresentation and show that for the period 1981-2020 levels of strategic underrepresentation of African American, Asian, and Latino voters in U.S. city politics are substantial. Underrepresentation is determined by the combination of several endogenous institutional features, starting from systematic disparity in voter registration, strategic selection of electoral rules, city’s form of government, council size, and pay of elected members of the council. We provide causal evidence of the strategic use of local political institutions in reducing electoral representation of minorities based on the U.S. Supreme Court narrow decision of Shelby County v. Holder (2013), which deemed unconstitutional Voting Rights Act (VRA) Section 4(b), removing federal preclearance requirements for a specific subset of U.S. jurisdictions.