Abstract

We evaluate the impacts of tax policy on asset returns using the U.S. municipal bond market. In theory, tax-induced ownership segmentation limits risk-sharing, creating downward-sloping regions of the aggregate demand curve for the asset. In the data, cross-state variation in tax privilege policies predicts differences in in-state ownership of local municipal bonds; the policies create incentives for concentrated local ownership. High tax privilege states have muni-bond yields that are more sensitive to variations in supply and local idiosyncratic risk. The effects are stronger when local investors face correlated background risk and/or diminishing marginal nonpecuniary benefits from holding local assets.

View research

Citation

Babina, Tetyana, Chotibhak Jotikasthira, Christian Lundblad, and Tarun Ramadorai. "Heterogeneous Taxes and Limited Risk Sharing: Evidence from Municipal Bonds." The Review of Financial Studies 34, no. 1 (January 2021): 509-568.

Each author name for a Columbia Business School faculty member is linked to a faculty research page, which lists additional publications by that faculty member.

Each topic is linked to an index of publications on that topic.