Tax Advantages and Imperfect Competition in Auctions for Municipal Bonds

Daniel Garrett, Andrey Ordin, James W. Roberts and Juan Carlos Suárez Serrato

No 23473, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the interaction between tax advantages for municipal bonds and the market structure of auctions for these bonds. We show that this interaction can limit a bidder’s ability to extract information rents and is a crucial determinant of state and local governments’ borrowing costs. Reduced-form estimates show that increasing the tax advantage by 3 pp lowers mean borrowing costs by 9-10%. We estimate a structural auction model to measure markups and to illustrate and quantify how the interaction between tax policy and bidder strategic behavior determines the impact of tax advantages on municipal borrowing costs. We use the estimated model to evaluate the efficiency of Obama and Trump administration policies that limit the tax advantage for municipal bonds. Because reductions in the tax advantage inflate bidder markups and depress competition, the resulting increase in municipal borrowing costs more than offsets the tax savings to the government. Finally, we use the model to analyze a recent non-tax regulation that affects entry into municipal bond auctions.

JEL-codes: D44 H71 L13 (search for similar items in EconPapers)
Date: 2017-06
New Economics Papers: this item is included in nep-fmk, nep-pub and nep-ure
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Published as Daniel Garrett & Andrey Ordin & James W Roberts & Juan Carlos Suárez Serrato, 2023. "Tax Advantages and Imperfect Competition in Auctions for Municipal Bonds," The Review of Economic Studies, vol 90(2), pages 815-851.

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