Negotiated Municipal Bond Underwritings: Implications for Efficiency: Note

Recent empirical research has demonstrated that increased bidder competition lowers borrowing costs for issuers of municipal bonds [4, 5, 7, 12, 13, 14]. Consequently, the accepted position of many economists is that new issues should be offered by competitive bid. However, this conclusion is unwarranted in the case of lower-quality bonds receiving only one or two bids. The purpose of this paper is to investigate the economic consequences of municipalities selling bonds by negotiation. More specifically, it investigates the hypothesis that in instances when issuers face relatively high demand uncertainty for their new bonds, it is potentially more efficient to sell bonds by negotiation than by competitive bidding. It is shown that, for lower rated bonds having only one or two bids, cost savings are possible by using negotiation.