Status Quo Bias in Municipal Bond Underwriter Selection

Abstract

Status quo bias is the tendency to select a previously chosen alternative disproportionately often in decision-making. Selecting the status quo when the current state is not objectively superior to other available alternatives results in a suboptimal outcome. This article extends the concept of status quo bias to municipal debt issuance. It analyzes a specific behavioral decision-making situation involving a state government that repeatedly uses the same underwriting firm disproportionately often, even when use of the same underwriter continually returns higher interest costs. the article uses data on California state general obligation bonds and Monte Carlo simulation techniques to analyze several paths of interest costs that deviate from a hypothetical optimal outcome. the analysis offers useful insights for state government debt management in complex and evolving markets where, in some cases, repeated use of the same underwriting firm might result in continually higher interest costs and limit interest cost savings.