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Infrastructure has become an important part of institutional investors´ alternative asset portfolios all over the world. This paper documents that larger pension funds, public pension funds, and pension funds with a larger allocation to alternative assets are more likely to invest in infrastructure, and to manage it internally. Smaller pension funds make more use of intermediated external investment approaches, face higher investment costs and realize lower returns. We observe significant economies of scale for the investment performance of pension fund investments in infrastructure, while financial intermediation does not seem to lead to worse performance. Overall, as an institutional investment, infrastructure has proven to be the best-performing asset class over the 2007-2018 time period. The increase in infrastructure allocations by pension funds seem to be justified from a risk/return point of view.
Biased Beliefs and Credit Risk in the Muni Bond Market
Pati, Abinash; Jeung, Jinoug; Chordia, Tarun
Emory University, United States of America;
We show that the pricing of credit risk in the municipal bond market depends on the salience of its underlying cash-flow shocks. Public mass shootings raise borrowing costs of issuers in affected counties by an average of 6 (5.2) basis points in the secondary (primary) market. This increase in tax-adjusted yield spreads is not driven by any material change in the issuers' fundamentals, nor by an increase in liquidity risk, risk aversion, or excess debt supply. In contrast, we find no evidence of the violent crime rate in the county being a priced risk factor. The evidence supports an explanation based on biased expectations of fundamentals growth brought about by media driven salience.
Federal Tax Deductions and the Provision of Local Public Goods
Ambrose, Brent W.; Valentin, Maxence
Penn State University, United States of America;
Property taxes are the primary funding mechanism by which local governments pay for public goods. In the United States, the federal income tax system provides a subsidy to this cost by allowing taxpayers to deduct property taxes on their federal income tax returns. Using local referendum approval rates, we confirm a positive relation between the demand for public goods and the share of residents deducting property taxes. Based on this evidence, we develop a theoretical model that accounts for the ability of residents to deduct their property taxes to demonstrate the capitalization of public goods into house values. We empirically support the model's predictions using cross-sectional variation in educational spending. Thus, our results suggest that the 2017 Tax Cut and Jobs Act (TCJA), which increased the standard deduction and reduced the share of taxpayers who deduct property taxes, has the potential to restore equity in the property tax system.