AbstractPrevious studies of privatization have considered the cost‐effectiveness of privatizing more labor‐intensive services. This study examines the effectiveness of public and private delivery of a more capital‐intensive service: insuring municipal bonds against default. Credit enhancement for local government bonds is available from private insurance companies and from some state governments. Because of their reduced default risk, bonds backed by a third party should incur lower interest rates. This research considers two questions. Does a third party guarantee lower interest rates? Is private bond insurance more cost‐effective than the credit enhancement programs of state governments in lowering interes