A municipal bond issuer has a choice in how its debt is issued. With negotiated issuance, one or more underwriting firms acting together  purchase the bonds from the issuer. The issuer and the underwriter negotiate many of the terms of the issuance. With competitive issuance, bidders buy all the bonds according to take-it-or-leave-it terms proposed by the issuer in a widely circulated prospectus.

Some observers believe they have seen systematic differences in the costs to the issuer under the two methods. These perceived differences have, in turn, led to research to evaluate whether–or under what conditions–one method is superior to another.

Our research indicates a strong tendency for issuers to select the method of issuance that best suits the nature of the issue at hand, such that policies to mandate one type of issuance over the other will likely increase, rather than decrease, issuance costs.

Citation:

Fruits, E., Pozdena, R., Booth, J., and Smith, R. (2008). A comprehensive evaluation of the comparative cost of negotiated and competitive methods of municipal bond issuance. Municipal Finance Journal, 28(4):15-41.