213 Social Sciences
Durham, NC 27705
Institutional Affiliation: Duke University
NBER Working Papers and Publications
|June 2017||Tax Advantages and Imperfect Competition in Auctions for Municipal Bonds|
with , , : w23473
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 a...