Tax Advantages and Imperfect Competition in Auctions for Municipal Bonds

110 Pages Posted: 5 Jun 2017 Last revised: 20 Feb 2021

See all articles by Daniel Garrett

Daniel Garrett

Duke University

Andrey Ordin

Duke University

James W. Roberts

Duke University

Juan Carlos Suárez Serrato

Duke University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: June 2017

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.

Suggested Citation

Garrett, Daniel and Ordin, Andrey and Roberts, James W. and Suárez Serrato, Juan Carlos, Tax Advantages and Imperfect Competition in Auctions for Municipal Bonds (June 2017). NBER Working Paper No. w23473, Available at SSRN: https://ssrn.com/abstract=2980581

Andrey Ordin

Duke University

100 Fuqua Drive
Durham, NC 27708-0204
United States

James W. Roberts

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Juan Carlos Suárez Serrato

Duke University - Department of Economics ( email )

Durham, NC 27708-0204
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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