The Influence of Jurisdiction Size and Sale Type on Municipal Bond Interest Rates 709 Bill Simonsen Mark D. Robbins University of Connecticut Lee Helgerson University of Oregon The Influence of Jurisdiction Size and Sale Type on Municipal Bond Interest Rates: An Empirical Analysis The authors use data on municipal bond sales in Oregon from 1994 to 1997 to explore whether population (as a proxy for financial-management capacity) and sale type (competitive or negoti- ated sale) influence interest rates. They find that smaller jurisdictions pay an interest cost penalty in the municipal bond market, and that competitive sales result in significantly lower interest rates compared to negotiated sales. The authors suggest that measures to enhance the financial-man- agement capacity of small governments are warranted and that state laws requiring justification for negotiated sales are appropriate. The United Sates municipal bond market is very large, with $150 billion to $300 billion issued annually. The total municipal debt outstanding equals about 18 percent of the U.S. gross domestic product. Most local govern- ments selling municipal bonds are small and sell infre- quently. Two random sample surveys of municipal bond issues undertaken in the winter of 1996 showed the me- dian population of governments issuing municipal bonds to be about 20,000 people (Simonsen and Kittredge 1996). 1 However, there has been very little research that focuses on small issuers. In this article we examine the determinants of munici- pal bond interest rates. Specifically, we explore two re- search questions: first, does management capacity influ- ence municipal bond interest rates? As we will explain, the literature suggests that small communities typically have a smaller financial-management staff that is less so- phisticated, frequently comprised of generalists, and of- ten working part time. We proxy financial-management capacity using government population size and test whether this has an effect on interest rates. Second, does the method of sale affect municipal bond interest rates? We examine whether issuers experience an interest rate difference between bonds sold competitively versus those sold through negotiation (these are the two predominant ways in which municipal bonds are sold). We use data on bond sales in Oregon from 1994 to 1997 to answer these research questions. First, we look at the literature on man- agement capacity and sale type. Second, we describe our methodology. Next, we report our research findings about the above two research questions. Finally, we discuss our research results and conclusions. Literature Review—Management Capacity and Population The management capacity of a local government re- volves around managers’ ability to know “whether they are doing the ‘right’ thing programmatically, whether they are doing it ‘well’, and whether they are doing ‘enough’ or Bill Simonsen is an associate professor at the University of Connecticut in the Institute of Public Affairs and Department of Political Science. He is also the director of the MPA program. Email: simonsen@uconnvm.uconn.edu. Mark D. Robbins is an assistant professor at the University of Connecticut in the Institute of Public Affairs and Department of Political Science. He and Bill Simonsen have co-founded the Public Finance Project at the University of Connecticut. Email: mrobbins@uconn.edu. Lee Helgerson is a research analyst with the Oregon State Treasury. He was a graduate student in the Department of Planning, Public Policy, and Man- agement at the University of Oregon. Email: Lee.Helgerson@ost.state.or.us.