Heterogeneous Taxes and Limited Risk Sharing: Evidence from Municipal Bonds

112 Pages Posted: 18 Mar 2015 Last revised: 28 Feb 2019

See all articles by Tania Babina

Tania Babina

Columbia Business School - Finance and Economics

Chotibhak Jotikasthira

Southern Methodist University (SMU) - Finance Department

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School

Tarun Ramadorai

Imperial College London; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: February 26, 2019

Abstract

We evaluate the impacts of tax policy on asset returns using the U.S. municipal bond market. In theory, tax-induced ownership segmentation limits risk-sharing, creating downward-sloping regions of the aggregate demand curve for the asset. In the data, cross-state variation in tax privilege policies predicts differences in in-state ownership of local municipal bonds; the policies create incentives for concentrated local ownership. High tax privilege states have muni bond yields that are more sensitive to variations in supply and local idiosyncratic risk. The effects are stronger when local investors face correlated background risk and/or diminishing marginal non-pecuniary benefits from holding local assets.

Keywords: Taxes, government debt, municipal bonds, segmentation, ownership, clientele effects, public finance, political risk

JEL Classification: F30, G12, G15, H63

Suggested Citation

Babina, Tania and Jotikasthira, Chotibhak and Lundblad, Christian T. and Ramadorai, Tarun, Heterogeneous Taxes and Limited Risk Sharing: Evidence from Municipal Bonds (February 26, 2019). Available at SSRN: https://ssrn.com/abstract=2579350 or http://dx.doi.org/10.2139/ssrn.2579350

Tania Babina

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Chotibhak Jotikasthira

Southern Methodist University (SMU) - Finance Department ( email )

United States

Christian T. Lundblad (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-8441 (Phone)

Tarun Ramadorai

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

HOME PAGE: http://www.tarunramadorai.com

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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