213 Social Sciences
Durham, NC 27705
NBER Working Papers and Publications
|June 2017||Tax Advantages and Imperfect Competition in Auctions for Municipal Bonds|
with Daniel Garrett, James W. Roberts, Juan Carlos Suárez Serrato: w23473
We study the interaction between tax advantages for municipal bonds and the market structure of auctions for these bonds. We show this interaction can limit the ability of bidders 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%, consistent with a greater-than-unity passthrough elasticity. We estimate a structural auction model to measure markups, and to illustrate and quantify how the interaction between tax policy and bidder strategic behavior leads to large passthrough elasticities. We use the estimated model to evaluate the efficiency of Obama and Trump administration policies that limit the tax advantage for municipal bon...