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Heterogeneous Taxes and Limited Risk Sharing
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Heterogeneous Taxes and Limited Risk Sharing
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Heterogeneous Taxes and Limited Risk Sharing
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Journal Article
Heterogeneous Taxes and Limited Risk Sharing
2021
Overview
We evaluate the impacts of tax policy on asset returns using the U.S. municipal bond market. In theory, tax-induced ownership segmentation limits risk sharing, creating downwardsloping regions of the aggregate demand curve for the asset. In the data, cross-state variation in tax privilege policies predicts differences in in-state ownership of local municipal bonds; the policies create incentives for concentrated local ownership. High tax privilege states have muni bond yields that are more sensitive to variations in supply and local idiosyncratic risk. The effects are stronger when local investors face correlated background risk and/or diminishing marginal nonpecuniary benefits from holding local assets.
