DP7767 Tax Arbitrage with Risk and Effort Aversion -- Swedish Lottery Bonds 1970-1990
Swedish lottery bonds are valuable tax shelters before the tax reform of 1991. By trading around the coupon lottery, high-tax investors with capital gains from the stock market shift their tax liability to low-tax investors. The uncertainty of the coupon lottery and the effort of
verifying the winning lottery bond numbers are a nuisance to tax traders. We investigate how the Treasury (issuer), market makers (banks), and lottery bond investors respond to those frictions.