Tax Advantages and Imperfect Competition in Auctions for Municipal Bonds
James W. Roberts and
Juan Carlos Suárez Serrato ()
No 23473, NBER Working Papers from National Bureau of Economic Research, Inc
We show that the effect of tax advantages of municipal bonds on the market microstructure of municipal bond auctions 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%, consistent with a greater than-unity passthrough elasticity. Non-parametric evidence shows that strategic participation and bidding in imperfectly-competitive auctions generates this greater-than-unity passthrough. Using a structural auction model to evaluate the efficiency of Obama and Trump administration proposals, we find that the reduction in municipal borrowing costs is 2.8-times the revenue cost of the tax advantage.
JEL-codes: D44 H71 L13 (search for similar items in EconPapers)
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