French local governments' debt and financial intermediation.

Summary Our research aims to show that the theory of financial intermediation can provide a new explanation for the debt behavior of local governments, especially in their trade-off between bank debt and mandatory debt. In line with certain models derived from the theory of financial intermediation, the model presented here shows that, because of the high issuance costs, only local governments with large borrowing needs can finance themselves on the market. On the other hand, local governments choose their source of debt by comparing the expected gain from renegotiation and the additional cost of bank financing. The hypotheses of the model were tested, partly successfully, on a sample of 94 local authorities over the period 1985-1995. The results show that the size effect and the quality of the local authority are determining factors in the trade-off between the two types of debt.