The period since 1989 has seen significant changes in the structure of household ownership of municipal debt, with ownership becoming concentrated in a smaller number of households over time.   The share of households holding any municipal debt fell from 4.6 percent to 2.4 percent between 1989 and 2013.  The share of total debt that is held by the wealthiest 0.5 percent of households rose from 24 percent to 42 percent over the same period.  These changes have coincided with the growth of tax-deferred retirement investment accounts such as 401(k) plans as a primary location of household investing.  Municipal bonds, which pay tax-exempt interest, are almost never held inside of these tax-deferred accounts.  These changing patterns of ownership have implications for the political economy of the municipal bond market.  

In this paper we undertake the first joint investigation of bidding in the primary market and trading in the immediate post-issuance secondary market for municipal bonds.  We introduce a ‘distance-to-next-bid’ measure – the distance by which the winning underwriter’s bid exceeded the next highest (non-winning) bid in the primary market.  We document a winners’ curse effect: bonds where the distance-to-next-bid is lower see larger price increases (over the reoffering price) in the post-issuance secondary market.  This winners’ curse effect appears to vary significantly across time, being lower at the peak of the financial crisis.  It also appears to vary by bond type, being higher in bonds sold with original issue discount.