The Impact of New Vendors on Depositor Demand and Performance of the Texas Local Government Investment Pool

Using performance data from TexPool, this study provides insight into the tradeoffs states must make when considering whether to retain a monopoly for their local government investment pool (LGIP) or open that short-term investment market to multiple providers. The study reports on the impact on both depositor demand and performance of a state-sponsored pool, TexPool, when competitors enter a previously closed market. This study finds that entry by additional vendors into the short-term money market, beyond the well-timed entry of an initial competitor, is (1) not associated with a change in depositor demand for the state's inaugural pool and (2) not associated with a change in that pool's performance in terms of the relative returns it provides to depositors. The findings suggest that opening the LGIP market to competition expanded the amount of cash invested in these money-market funds by providing local governments with more options for investing their short-term cash. From a policy perspective, multiple vendors offer comparable but distinct investment options that provide opportunities for local depositors to diversify placement of their available cash.