Competition and the Cost of Capital Revisited: Special Authorities and Underwriters in the Market for Tax-exempt Hospital Bonds

We explore the effects of two kinds of competition on the cost of capital in the tax-exempt bond market: (1) competition among underwriters and (2) competition among issuers (mostly auasi-government special authorities). The first kind of competition—competitive versus negotiated bidding processes—has received considerable previous attention. The second kind of competition has received far less attention and is related to the level of decentralization of the market for issuing bonds. Using a national database covering 14 years, we find that both kinds of competition lower interest rates, at least in the hospital sector.