More on the Effects of Municipal Bond Monopsony

IN AN earlier article in this Journal, I suggested quite strongly that "some issuers of general obligation state and local government bonds have paid interest rates above the competitive level because of monopsony in the underwriting and distribution of their securities."' However, because my article was primarily concerned with the effects of restricted bidding competition on new-issue reoffering yields, it did not provide direct estimates of the extent to which an issuer's "net interest cost"2 is inversely related to the number of bids he receives for his bonds. The purpose of this paper is to fill this gap by presenting the results of a study of the impact of fewness of bidders on the net interest cost of general-obligation state bond issues sold between 1956 and 1963. Briefly stated, the paper's main finding is that states which received only one bid for their bonds paid net interest costs approximately 4 per cent higher than those paid by states which received three or more bids for comparable issues. These results, of course, reinforce my earlier conclusion that sellers of new municipal issues consistently suffer a tangible disadvantage when they receive only one or two bids for their issues.