Working Paper: NBER ID: w16008
Authors: Andrew Ang; Vineer Bhansali; Yuhang Xing
Abstract: Build America Bonds (BABs) are a new form of municipal financing introduced in 2009. Investors in BAB municipal bonds receive interest payments that are taxable, but issuers receive a subsidy from the U.S. Treasury. The BAB program has succeeded in lowering the cost of funding for state and local governments with BAB issuers obtaining finance 54 basis points lower, on average, compared to issuing regular municipal bonds. For institutional investors, BAB issue yields are 116 basis points higher than comparable Treasuries and 88 basis points higher than comparable highly rated corporate bonds. For individual investors, BABs have lower yields than regular municipal bonds. Thus, on average the Federal government subsidy disadvantages individual U.S. taxpayers, who are the main holders of municipal bonds, and benefits new entrants in the municipal bond market.
Keywords: Build America Bonds; municipal financing; federal subsidy; borrowing costs; tax-exempt bonds
JEL Codes: G12; G28; H20; H24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Build America Bonds (BABs) (H74) | reduction in borrowing costs for state and local governments (H74) |
| federal government subsidy (H20) | reduction in borrowing costs for state and local governments (H74) |
| Build America Bonds (BABs) (H74) | attractiveness of municipal bonds to institutional investors (H74) |
| federal subsidy (H20) | wealth transfer from individual U.S. taxpayers to corporations, pension funds, and foreign investors (H24) |