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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 show that the effect of tax advantages of municipal bonds on the market structure 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)
New Economics Papers: this item is included in nep-fmk, nep-pub and nep-ure
Date: 2017-06
Note: IO PE
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