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Competition and the Cost of Capital Revisited: Special Authorities and Underwriters in the Market for Tax-emempt Hospital Bonds

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  • Alec Ian Gershberg
  • Michael Grossman
  • Fred Goldman

Abstract

We explore the effects of two kinds of competition on the cost of capital in the tax-exempt bond market: (1) competition amongst underwriters and (2) competition amongst issuers (most of which are quasi-public special authorities sanctioned by state governments). The first kind of competition--essentially, competitive versus negotiated bidding processes--has received considerable attention in the literature. The second kind of competition, the number of potential issuers available to a beneficiary of a bond issue, has received far less attention and is related to the level of decentralization of the market for issuing bonds. Studies of the effects of competition have often used small samples of bond issues--often in one or a few states and for one or a few years--to reach their conclusions. Using a national database covering fourteen years, we find that both kinds of competition lower interest rates, at least in the hospital sector.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7356.

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Date of creation: Sep 1999
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Publication status: published as A. Gershberg, M. Grossman & F. Goldman "Competition and the Cost of Capital Revisited: Special Authorities and Underwriters in the Market for Tax-exempt Hospital Bonds," National Tax Journal, Vol. 54, No. 2, June 2001: 255-280.
Handle: RePEc:nbr:nberwo:7356

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  1. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262200716, December.
  2. Kessel, Reuben, 1971. "A Study of the Effects of Competition in the Tax-exempt Bond Market," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 79(4), pages 706-38, July-Aug..
  3. Becker, Gary S & Murphy, Kevin M, 1993. "A Simple Theory of Advertising as a Good or Bad," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(4), pages 941-64, November.
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Cited by:
  1. Daniels, Kenneth N. & Vijayakumar, Jayaraman, 2007. "Does underwriter reputation matter in the municipal bond market?," Journal of Economics and Business, Elsevier, Elsevier, vol. 59(6), pages 500-519.
  2. Patrick Bernet & Thomas Getzen, 2008. "Can a violation of investor trust lead to financial contagion in the market for tax-exempt hospital bonds?," International Journal of Health Care Finance and Economics, Springer, Springer, vol. 8(1), pages 27-51, March.
  3. Gentry, William M., 2002. "Debt, investment and endowment accumulation: the case of not-for-profit hospitals," Journal of Health Economics, Elsevier, Elsevier, vol. 21(5), pages 845-872, September.

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