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 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.