Search Frictions and Product Design in the Municipal Bond Market / Giulia Brancaccio, Karam Kang.

Format:

Book

Author/Creator:

Brancaccio, Giulia.

Contributor:

National Bureau of Economic Research.

Kang, Karam.

Series:

Working Paper Series (National Bureau of Economic Research) no. w30775.

NBER working paper series no. w30775

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2022.

Summary:

This paper shows that product design shapes search frictions and that intermediaries leverage this channel to increase their rents in the context of the U.S. municipal bond market. The majority of bonds are designed via negotiations between a local government and its underwriter. They are then traded in a decentralized market, where the underwriter often also acts as an intermediary. Exploiting variations in state regulations that limit government officials' conflicts of interest, we provide evidence that bond design from the government's perspective involves a trade-off between flexibility and liquidity, but the underwriter benefits from designing and trading complex bonds. Motivated by these findings, we build and estimate a model of bond origination and trades to quantify market inefficiency driven by underwriters' role in intermediating trades and discuss policy implications.

Notes:

Print version record

December 2022.