By Komla Dzigbede
Associate Professor of Public Administration and Policy,
State University of New York at Binghamton
State and local governments frequently rely on the same bond underwriter across multiple debt issuances. In many cases, this practice is understandable and defensible. Familiarity with an issuer’s credit profile, governance structure, and institutional environment can reduce uncertainty, lower coordination costs, and facilitate smoother bond execution in complex and time-sensitive markets. From a practical standpoint, a government’s repeated use of the same underwriting firm often reflects experience, trust, and administrative efficiency rather than simple habit.
At the same time, research on government decision-making under uncertainty suggests that familiarity itself can shape choices in subtle ways. Behavioral finance highlights that decision-makers – particularly when operating under uncertainty – may favor existing arrangements simply because they are familiar. Importantly, status quo bias can arise even when decision-makers consider available information and act in good faith. It emerges because changing course can involve perceived risks, transaction costs, or uncertainty that make existing arrangements appear safer by comparison.
In the context of public-sector debt management, this raises an important question. Even when a government’s repeated use of the same underwriter is initially beneficial, can continued reliance on the status quo gradually lead to outcomes that are less cost-efficient than feasible alternatives?
A Behavioral Lens on Bond Underwriter Selection
Status quo bias refers to a well-documented tendency for decision-makers to favor existing options over alternatives, even when those alternatives may be objectively comparable. The concept does not imply error, complacency, or poor judgment. Rather, it reflects how individuals and organizations manage complexity and risk when information is imperfect and outcomes are uncertain.
Government debt issuance occurs in precisely this type of environment. Market conditions fluctuate, interest rates are volatile, and issuance decisions are often made under time constraints and political scrutiny. Against this backdrop, maintaining established underwriting relationships can feel prudent, particularly when existing issuer–underwriter relationships function well and prior issuances have been completed without visible problems.
The behavioral question, then, is not whether repeated use of the same underwriter is ever appropriate. Rather, it is whether comfort and familiarity may, over time, reduce a government’s incentives to reassess alternatives – even when doing so could plausibly improve borrowing outcomes.
Insights from Recent Research
My recent research examines this question by focusing on repeated underwriter selection in state government debt issuance. Using data on California general obligation bonds, the analysis explores how a government’s repeated reliance on the same underwriting firm may influence interest cost outcomes in a setting characterized by uncertainty, market risk, and evolving financial conditions.
Although the empirical analysis focuses on state government general obligation bonds, the decision-making environment it examines – repeated underwriter selection under uncertainty – is common across both state and local governments. Instead of relying solely on retrospective evaluation – that is, looking only at interest cost outcomes after debt issuance decisions are made – the research adopts a prospective approach. It examines how interest costs might evolve under different decision scenarios, including scenarios that deviate from observed choices, while accounting for bond-specific characteristics, issuer-related factors, municipal market conditions, and broader macroeconomic trends.
The analysis also compares observed outcomes to a hypothetical efficient benchmark representing the minimum interest cost that could be achieved given the same underlying conditions. This framing allows for a broader interpretation of performance. Rather than asking whether any single issuance decision was right or wrong, it asks whether a pattern of decisions systematically departs from what might be achievable under alternative but feasible choices.
What the Evidence Suggests
The evidence suggests that a government’s repeated reliance on the same underwriting firm can be associated with interest cost outcomes that deviate from more efficient possibilities. Even after accounting for market-wide volatility and macroeconomic risk, alternative decision paths could plausibly generate lower expected interest costs.
These results do not imply that a government’s repeated reliance on the same underwriter necessarily raises interest costs in every case, nor do they suggest misconduct or inefficiency on the part of issuers or underwriters. Instead, they point to the cumulative effects of decision patterns over time. Small, incremental deviations from an efficient benchmark – when repeated across many debt issuances – can add up to meaningful differences in government borrowing costs.
From a behavioral perspective, this pattern is consistent with how status quo bias tends to manifest in practice. These effects emerge gradually, as familiarity reduces the extent to which alternatives are actively compared and reassessed. As a result, the potential for gradual interest cost drift remains, even when each debt issuance decision appears reasonable when viewed in isolation.
Implications for State and Local Budget and Finance Practice
For state and local budget officers and debt managers, the practical relevance of these insights lies less in any single issuance decision and more in institutional process. Repeated use of the same underwriter may reflect sound judgment, particularly when market conditions are stable. However, comfort and efficiency are not the same thing.
Behavioral finance suggests that organizations benefit from periodically creating space for reassessment, even when existing arrangements appear to be working. In government debt management, this can take the form of benchmarking interest costs or establishing internal review processes that encourage periodic reassessment of underwriting arrangements. Such practices focus on process rather than prescription and help ensure that familiarity does not unintentionally crowd out periodic evaluation.
For local governments in particular – especially smaller or less frequent issuers – these dynamics may be even more salient. Limited internal capacity, infrequent market access, and heightened sensitivity to bond execution risk can reinforce reliance on familiar external relationships. In these settings, repeated use of the same underwriter may be a rational response to uncertainty and resource constraints. The risk of interest cost drift is heightened when opportunities for reassessment are limited.
What This Does Not Mean
It is worth emphasizing what these insights do not imply. Long-term relationships with underwriters can generate real benefits, including informational efficiencies, smoother coordination, and reduced execution risk. In some cases, repeated use may very well be the cost-effective choice for both state and local governments.
The discussion also does not suggest that governments should pursue underwriter rotation as a blanket policy, nor that deviations from an efficient benchmark reflect poor management. Debt issuance decisions are made within legal, political, and market constraints that vary widely across jurisdictions and over time.
The broader point is not to prescribe specific practices, but to highlight how behavioral factors can shape public financial decisions in subtle ways. Behavioral tendencies can shape public financial decisions in ways that are not always visible, even to experienced professionals. Recognizing those tendencies is a complement to – not a substitute for – technical expertise.
A Closing Observation
The central insight here is that behavioral factors matter, even in highly technical domains such as government debt issuance. Awareness of status quo bias can help distinguish between decisions driven by strategic judgment and those driven by habit.
In an environment where small differences in interest costs can translate into substantial fiscal consequences over time, institutional practices that encourage periodic reassessment may yield meaningful benefits. Behavioral awareness, in this sense, is not a critique of practice but an additional tool for improving it.
This post draws from: Dzigbede, K. D. (2021). “Status Quo Bias in Municipal Bond Underwriter Selection,” Public Finance and Management, 20(2), 150–181.
