Working Papers
Conflicts of Interest in Municipal Bond Advising and Underwriting, Updated October 2023. Accepted at The Review of Financial Studies.
Abstract. When can financial advisor conflicts of interest generate worse outcomes for clients? A regulation following from Dodd-Frank prohibits municipal advisors from simultaneously acting as bond underwriters. Using a difference-in-differences approach and 20,051 bond auctions, I test whether this reduction in advisor privileges affects financial advice and borrower outcomes. Bonds with potential dual advisor-underwriters see financing costs fall by 11.4 basis points after the advisor is no longer allowed to underwrite. The decline follows from increases in standardization, third party certification, and auction participation–consistent with limiting the adverse selection that arises due to advisors withholding information from the market.
Gas, Guns, and Governments: Financial Costs of Anti-ESG Policies (with Ivan Ivanov), Updated March 2024. Revise & Resubmit at The Journal of Finance.
Abstract. We study how restricting intermediary contracting over ESG policies distorts financial market outcomes. In 2021 Texas prohibited municipalities from hiring banks with certain ESG policies, leading to the abrupt exit of five large municipal bond underwriters. Issuers with historical relationships with the barred underwriters face higher uncertainty and borrowing costs after enactment of the laws, amounting to $300-$500 million in additional interest on $31.8 billion borrowed. These effects are consistent with deterioration in underwriter competition and loss of relationship-specific assets. We do not find that underwriter distribution network access or capacity constraints have a major impact on borrowing costs.
Capital Investment and Labor Demand: Evidence from 21st Century Stimulus Policy (with Mark Curtis, Eric Ohrn, Kevin Roberts, and Juan Carlos Suárez Serrato), Updated December 2023. Revise and Resubmit at American Economic Review.
Abstract. We study how tax policies that lower the cost of capital impact investment and labor demand. Difference-in-differences estimates using confidential Census Data on manufacturing establishments show that tax policies increased both investment and employment, but did not stimulate wage or productivity growth. Using a structural model, we find that the primary effect of the policy was to increase the use of all inputs by lowering costs of production and that capital and production workers are complementary inputs in modern manufacturing. Our results show that tax policies that incentivize capital investment do not lead manufacturing plants to replace workers with machines.
Effects of International Tax Provisions on Domestic Labor Markets (with Eric Ohrn and Juan Carlos Suárez Serrato) [Brookings summary and policy brief]
Abstract. How does international taxation impact domestic workers? We study two fundamental elements of international tax systems by analyzing US provisions that isolate these elements. The first provision—the 1997 “Check-the-Box” regulations—lowered effective tax rates abroad by facilitating profit shifting from high tax foreign affiliates to tax havens. The second provision—the 2004 “repatriation holiday”—decreased tax costs of repatriating foreign earnings. Using a dynamic difference-in-differences framework, we estimate that local exposure to Check-the-Box significantly reduced domestic employment and earnings. This result implies that multinationals substitute domestic with foreign activity in response to lower effective tax rates abroad. We find the repatriation holiday had no effects on labor markets, indicating foreign cash holdings of US MNCs are not an important source of financing for domestic business activity. We conclude that policies that lower the foreign taxes of US MNCs are unlikely to benefit domestic workers.
Power Banks: Do Tax Equity Investors Add Value to Renewable Power Projects? (with Sophie Shive)
Abstract. Tax equity investors in renewable power projects, generally large banks, have deep investment experience but little technological expertise. Do they add value commensurate with their required returns? In 529 U.S. solar and wind plants from 2006-2022, tax equity is associated with higher quality projects for measures that affect its returns. Projects are built faster and produce 5% closer to capacity but have lower revenue per megawatt produced and per dollar invested, negatively affecting equity sponsor returns. Two natural experiments suggest that the greater efficiency is due to monitoring or up-front contracting by tax equity investors and not merely to project selection.
Published and Forthcoming Papers
Tax Advantages and Imperfect Competition in Auctions for Municipal Bonds (with Andrey Ordin, James W. Roberts, and Juan Carlos Suárez Serrato), 2023, Review of Economic Studies, 90(2): 815-851.
Abstract. We study the interaction between tax advantages for municipal bonds and the market structure of auctions for these bonds. We show that this interaction can limit a bidder’s ability to extract information rents and is a crucial determinant of state and local governments’ borrowing costs. Reduced-form estimates show that increasing the tax advantage by 3 pp lowers mean borrowing costs by 9-10%. We estimate a structural auction model to measure markups and to illustrate and quantify how the interaction between tax policy and bidder strategic behavior determines the impact of tax advantages on municipal borrowing costs. We use the estimated model to evaluate the efficiency of Obama and Trump administration policies that limit the tax advantage for municipal bonds. Because reductions in the tax advantage inflate bidder markups and depress competition, the resulting increase in municipal borrowing costs more than offsets the tax savings to the government. Finally, we use the model to analyze a recent non-tax regulation that affects entry into municipal bond auctions.
Tax Policy and Local Labor Market Behavior (with Eric Ohrn and Juan Carlos Suárez Serrato), 2020, American Economic Review: Insights, 2 (1): 83-100.
NBER Working Paper Version with Additional Results
Abstract. Since 2002, the US government has encouraged business investment using accelerated depreciation policies that significantly reduce investment costs. We provide the first in-depth analysis of this stimulus on employment and earnings. Our local labor markets approach exploits cross-industry variation in policy generosity interacted with county-level industry location data. This strategy identifies the partial equilibrium effects of accelerated depreciation. Places that experience larger decreases in investment costs see an increase in employment and earnings. In contrast, the policy does not have positive effects on earnings-per-worker. Overall, our findings suggest federal corporate tax policy has large effects on local labor markets.
How Elastic is the Demand for Tax Havens? Evidence from the US Possessions Corporations Tax Credit (with Juan Carlos Suárez Serrato), 2019, AEA Papers and Proceedings, 109 : 493-99.
Abstract. Why do some firms adopt certain tax havens and how sensitive is the demand for tax havens? We address these questions by studying how the repeal of Section 936 tax credits affected firms with affiliates in Puerto Rico. We first describe the characteristics of US multinationals that were exposed to Section 936. We then show that the market value of exposed firms decreased after losing access to Section 936, implying that firms could not perfectly substitute to other tax havens. Finally, we find that firms exposed to Section 936 did not respond by expanding their network of tax havens.
Hopefully Future Working Papers
How Does Capital Investment Affect Workers? Evidence from Bonus Depreciation and Matched Employer-Employee Data (with Mark Curtis, Eric Ohrn, Kevin Roberts, and Juan Carlos Suárez Serrato)
Breaking Up: When Do Banking Relationships End? (with Marius Guenzel and Mahdi Shahrabi)
Information, Investor ESG Preferences, and Public Borrowing Costs (with Brian Gibbons and Mahdi Shahrabi)
Tax Incidence in the Market for Medical Devices. EGAP Pre-registration ID
20180605AA.