Interest paid by U.S. state and local bonds is tax-exempt, making these bonds attractive to investors - though a tax rule limits arbitrage opportunities by restricting associated interest expense deductions. Prior to 1986, U.S. banks were not subject to the interest deduction limitation, making...

In the current recession, politicians grant state aid of yet unknown dimensions. But what is the most efficient measure for granting such aid? We use a theoretical model with firms that differ in their creditworthiness and compare different types of direct subsidies with indirectly subsidized...