Daniel G. Garrett

Daniel Garrett and Ivan T. Ivanov (Under Revision), Gas, Guns, and Governments: Financial Costs of Anti-ESG Policies.

Abstract: We study how regulation limiting ESG policies distorts financial market outcomes. In 2021 Texas enacted laws that prohibit municipalities from contracting with banks with certain ESG policies, leading to the exit of five of the largest municipal bond underwriters from the state. Issuers previously reliant on these underwriters face higher uncertainty and borrowing costs since the enactment of the laws. These effects are consistent with deterioration in underwriter competition as issuers face fewer potential underwriters. Texas issuers will incur $300-$500 million in additional interest on the $31.8 billion borrowed during the first eight months following enactment.

Daniel Garrett, Andrey Ordin, James Roberts, Juan Carlos Suarez Serrato (2023), Tax Advantages and Imperfect Competition in Auctions for Municipal Bonds, The Review of Economic Studies, 90 (2), pp. 815-851. https://doi.org/10.1093/restud/rdac035

Abstract: We study the interaction between tax advantages for municipal bonds and the market structure of auctions for these bonds. We show that this interaction can limit a bidder’s ability to extract information rents and is a crucial determinant of state and local governments’ borrowing costs. Reduced-form estimates show that increasing the tax advantage by 3 pp lowers mean borrowing costs by 9–10%⁠. We estimate a structural auction model to measure markups and to illustrate and quantify how the interaction between tax policy and bidder strategic behaviour determines the impact of tax advantages on municipal borrowing costs. We use the estimated model to evaluate the efficiency of Obama and Trump administration policies that limit the tax advantage for municipal bonds. Because reductions in the tax advantage inflate bidder markups and depress competition, the resulting increase in municipal borrowing costs more than offsets the tax savings to the government. Finally, we use the model to analyse a recent non-tax regulation that affects entry into municipal bond auctions.

Daniel Garrett, Mark Curtis, Kevin Roberts, Eric Ohrn, Juan Carlos Suarez Serrato (Under Revision), Capital Investment and Labor Demand.

Abstract: We study how tax policies that lower the cost of capital impact investment and labor demand. Difference-in-differences estimates using confidential US Census Data on manufacturing establishments show that tax policies increased both investment and employment, but did not lead to wage or productivity gains. Using a structural model, we show that the primary effect of the policy was to increase the use of all inputs by lowering overall costs of production. The policy further stimulated production employment due to the complementarity of production labor and capital. Supporting this conclusion, we find that investment is greater in plants with lower labor costs. Our results show that recent tax policies that incentivize capital investment do not lead manufacturing plants to replace workers with machines.

Daniel Garrett (Under Revision), Conflicts of Interest in Municipal Bond Advising and Underwriting.

Abstract: A regulation following from Dodd-Frank prohibits municipal financial advisors from simultaneously acting as municipal bond underwriters. Using a difference-in-differences approach, I test whether this reduction in advisor privileges affects financial advice and bond outcomes. Bonds with potential dual advisor-underwriters see financing costs fall by 11.4 basis points (5.3% of average yield) after the advisor is no longer allowed to underwrite. The decline is concentrated in opaque school district bonds and new money issues. Non-advisors compete for underwriting business more aggressively since they are less likely to face adverse selection after previously conflicted advisors encourage creditworthy borrowers to obtain credit ratings.

Daniel Garrett, Eric Ohrn, Juan Carlos Suarez Serrato (2020), Tax Policy and Local Labor Market Behavior, American Economic Review: Insights, 2 (1), pp. 83-100. 10.1257/aeri.20190041

Abstract: Since 2002, the US government has encouraged business investment using accelerated depreciation policies that significantly reduce investment costs. We provide the first in-depth analysis of this stimulus on employment and earnings. Our local labor markets approach exploits cross-industry variation in policy generosity interacted with county-level industry location data. This strategy identifies the partial equilibrium effects of accelerated depreciation. Places that experience larger decreases in investment costs see an increase in employment and earnings. In contrast, the policy does not have positive effects on earnings-per-worker. Overall, our findings suggest federal corporate tax policy has large effects on local labor markets.

Daniel Garrett and Juan Carlos Suarez Serrato (2019), How Elastic is the Demand for Tax Havens? Evidence from the US Possessions Corporations Tax Credit, AEA Papers and Proceedings, 109, pp. 493-499. 10.1257/pandp.20191044

Abstract: Why do some firms adopt certain tax havens and how sensitive is the demand for tax havens? We address these questions by studying how the repeal of Section 936 tax credits affected firms with affiliates in Puerto Rico. We first describe the characteristics of US multinationals that were exposed to Section 936. We then show that the market value of exposed firms decreased after losing access to Section 936, implying that firms could not perfectly substitute to other tax havens. Finally, we find that firms exposed to Section 936 did not respond by expanding their network of tax havens.