Competition and the cost of government borrowing

I've started a paper that looks at syndicated lending: the cases where a firm receives a loan from a syndicate of banks, led by one of the banks. It's a fascinating world - especially if you're interested in competition. Can collusion in this market help overcome market failure? If so, how do you know when it does? 

Whatever the answer, it seems that governments may have to wrestle with a similar question … urgently. A recent Bloomberg article discussess the way governments issue bonds. Who gets to be the top underwriter?

In a recent case, in the state of Massachusetts, state treasurer Steven Grossman is quoted as saying that "[T]here's always a certain amount of competition going on out there." Had adds that "[T]hat's good. We like competition."

So do I. But how much competition is there in this market? The same article states that in the US, only "about 20 percent of debt issues by states and local governments is sold through competitive bids."

In the remaining 80 percent, so-called 'negotiated underwriting' takes place. Rolling Stone magazine, in a recent post, is highly critical of this 80 percent, citing research by University of Connecticut professors Mark Robbins and William Simonsen, who find that competitive issues lower borrowing costs.

Worthy of more attention, imho….

© J.W.B. Bos 2014