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  3. Journal of Economic Perspectives
  4. Spring 2025
  5. Why Is the Fragmented Municipal Bond Market So Costly to Investors and Issuers?

Journal of Economic Perspectives

ISSN 0895-3309 (Print) | ISSN 1944-7965 (Online)

Why Is the Fragmented Municipal Bond Market So Costly to Investors and Issuers?

  • John M. Griffin
  • Nicholas Hirschey
  • Samuel Kruger
Journal of Economic Perspectives
vol. 39, no. 2, Spring 2025
(pp. 235–60)
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Abstract

The municipal bond market plays a crucial role in providing capital to US municipalities and functions through a network of underwriters, municipal advisors, credit rating agencies, insurers, individual and institutional investors, and multiple regulators. Many of these market participants have significant asymmetric information and conflicting incentive structures, which can sometimes lead to disparate and seemingly inefficient outcomes. Puzzles documented in the academic literature include high underwriting costs, conflicting roles by municipal advisors, extreme and widely varying trade markups, investment holdings that are often not tax-efficient, inconsistent implied marginal tax rates, a heavy reliance on credit ratings, little benefit but widespread use of insurance, delayed use of call provisions, and inconsistent treatment of accounting information. We review issues in the municipal bond market and propose implementable suggestions that would hopefully allow for a more competitive and low-cost market for both taxpayers and investors.

Citation

Griffin, John M., Nicholas Hirschey, and Samuel Kruger. 2025. "Why Is the Fragmented Municipal Bond Market So Costly to Investors and Issuers?" Journal of Economic Perspectives 39 (2): 235–60. DOI: 10.1257/jep.20241411

Additional Materials

JEL Classification

  • G12 Asset Pricing; Trading Volume; Bond Interest Rates
  • G23 Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors
  • G24 Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies
  • G41 Behavioral Finance: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets [Neurofinance]
  • H22 Taxation and Subsidies: Incidence
  • H74 State and Local Borrowing