Self-selection bias or decision inertia? Explaining the municipal bond “competitive sale dilemma”
Journal of Public Budgeting, Accounting & Financial Management
ISSN: 1096-3367
Article publication date: 5 March 2018
Issue publication date: 5 March 2018
Abstract
Purpose
Although most empirical studies find that competitive bidding can reduce the interest cost, the municipal bond primary market is dominated by negotiating offerings. The purpose of this paper is to investigate this dilemma by empirically testing two hypotheses: self-selection bias and decision inertia hypotheses.
Design/methodology/approach
Logistic regressions and Heckman procedures are used to examine data from the California municipal bond primary market.
Findings
The paper finds that while information asymmetry does affect the selection of underwriting approach, self-selection bias cannot explain the cost difference between the two sale approaches. On the other hand, decision inertia has the highest explanatory power in the selection of sale approaches.
Originality/value
This paper provides a new explanation for the “competitive sale dilemma” from the perspective of decision inertia. The authors document that state and local governments show a greater propensity of adhering to previous choices, particularly in a context in which the outcome is uncertain or actors have little knowledge in comparing the outcome of the alternatives.
Keywords
Citation
Liu, G. (2018), "Self-selection bias or decision inertia? Explaining the municipal bond “competitive sale dilemma”", Journal of Public Budgeting, Accounting & Financial Management, Vol. 30 No. 1, pp. 86-106. https://doi.org/10.1108/JPBAFM-03-2018-008
Publisher
:Emerald Publishing Limited
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