Sovereign debt auctions: Uniform or discriminatory?

Many financial assets, especially government bonds, are issued by an auction. An important feature of the design is the auction pricing mechanism: uniform versus discriminatory. Theoretical papers do not provide a definite answer regarding the dominance of one type of auction over the other. We investigate the revealed preferences of the issuers by surveying the sovereign issuers that conduct auctions. We find that the majority of the issuers/countries in our sample use a discriminatory auction mechanism for issuing government debt. We use a multinomial logit procedure and discriminatory analysis to investigate the mechanism choice. It was interesting to find that market-oriented economies and those that practice common law tend to use a uniform method while economies who are less market oriented and practice civil law tend to use discriminatory price auctions.     

RULE CHANGES AND UNCERTAINTY IN DISCRIMINATORY AND UNIFORM PRICE AUCTIONS

The auction literature indicates that uncertainty about the value of auctioned goods increases underpricing in discriminatory price auctions. Such uncertainty has a smaller effect on uniform price auctions because the pricing rule aggregates bidders' information. We find that uncertainty resulting from inexperience with an auction mechanism has similar effects. Using initial public offering (IPO) data from Japan and Israel, we find that average underpricing increases temporarily in Japan's discriminatory price auctions after changes in the auction rules, which suggests that bidders reduce their bids in response to uncertainty. Underpricing in Israel's uniform price auctions is not affected by rule changes.     

Multiple Unit Auctions and Short Squeezes

This article develops a theory of multiunit auctions where shortsqueezes can occur in the secondary market. Both uniform anddiscriminatory auctions are studied and bidders can submit multiplebids. We show that bidders with short and long preauction positionshave different valuations in an otherwise common value setting.Discriminatory auctions lead to more short squeezing and higherrevenue than uniform auctions, ceteris paribus. Asymptotically,as the auction size approaches infinity, the two formats leadto equivalent outcomes. Shorts employ more aggressive equilibriumbidding strategies. Most longs strategically choose to be passive.Free riding on a squeeze by small, long players has no impacton these results, but affects revenue in discriminatory auctions.     

Tacit collusion and capacity withholding in repeated uniform price auctions

This article analyzes tacit collusion in infinitely repeated multiunit uniform price auctions in a symmetric oligopoly with capacity‐constrained firms. Under two popular definitions of the uniform price, when each firm sets a price‐quantity pair, perfect collusion with equal sharing of profit is easier to sustain in the uniform price auction than in the corresponding discriminatory auction. Moreover, capacity withholding may be necessary to sustain this outcome. Even when firms may set bids that are arbitrary finite step functions of price‐quantity pairs, in repeated uniform price auctions maximal collusion is attained with simple price‐quantity strategies exhibiting capacity withholding.     

Auctions of divisible goods: on the rationale for the treasury experiment

We compare a sealed-bid uniform-price auction (the Treasury'sexperimental format) with a sealed bid discriminatory auction(the Treasury's format heretofore), assuming the good is perfectlydivisible. We show that the auction theory that prompted theexperiment, which assumes single-unit demands, does not adequatelydescribe the bidding game for Treasury securities. Collusivestrategies are self-enforcing in uniform-price divisible-goodauctions. In these equilibria, the seller's expected revenueis lower than in equilibria of discriminatory auctions.     

The overconfidence of investors in the primary market

We analyze the investment performance of 6993 investors bidding in 77 discriminatory IPO auctions in the Taiwan stock market between January 1996 and April 2000, and find that frequent bidders in these auctions have lower returns than infrequent bidders. The frequent bidders bid too aggressively and evaluate the IPO firms too optimistically, resulting in inferior performance. Despite being quite successful in their first few auction bids, the returns for frequent investors are gradually reduced in subsequent auctions. The multivariate model and the analysis of the possibility of perverse incentives of brokerage firms suggest that our findings cannot be explained by rational hypotheses, whereas in contrast, the theories on overconfidence and self-attribution bias can explain the increase in bidding frequency and the deterioration in return performance for bidders in IPO auctions.     

An empirical study of auction revenue rankings: the case of municipal bonds

Using a novel dataset of 386 first‐price municipal bond auctions held in California, I perform counterfactual revenue comparisons, based on the theoretical result of Milgrom and Weber (1982). I show that the revenue in the second‐price auction is nonparametrically identified, and the counterfactual revenue in the English auction can be bounded in an informative way. These results form a basis for nonparametric estimation of counterfactual revenue differences. I find that the revenue gain from using the English auction would be in the range of 11%—19% of the gross underwriting spread, and that most of it would already be captured by using the second‐price auction. The recent explosive growth of Internet English auctions, administered by Grant Street Group, provides external support to the claim that auction design matters in this market.     

Auction failures and the market for auction rate securities

The market for auction rate securities (ARS) made headlines during the second week of February 2008 when auctions at which the bonds’ interest rates reset experienced a wave of “failures.” Contrary to headlines that attribute the failures to a “frozen” market or investors’ “irrationality,” we find that (1) even at their height, less than 50% of ARS experienced auction failures, (2) the likelihood of auction failure was directly related to the level of the bonds’ “maximum auction rates,” (3) the implied market clearing yields of bonds with failed auctions were significantly above their maximum auction rates, and (4) ARS yields were generally higher than yields of various cash equivalent investment alternatives. We infer that investors priced the possibility of auctions failures into ARS yields and rationally declined to bid for bonds for which required market yields exceeded their maximum auction rates.     

Auctions with resale markets: an exploratory model of Treasury bill markets

This article develops a model of competitive bidding with aresale market. The primary market is modeled as a common-valueauction, in which bidders participate for the purpose of resale.After the auction the winning bidders sell the objects in asecondary market, and the buyers in the secondary market, receiveinformation about the bids submitted in the auction. The effectof this information linkage between the primary auction andthe secondary market on bidding behavior in the primary auctionis examined. The auctioneer's expected revenues from organizingthe primary market as a discriminatory auction versus a uniform-priceauction are compared, and sufficient conditions under whichthe uniform-price auction will yield higher expected revenuesare obtained. An example of our model, with the primary marketorganized as a discriminatory auction, is the U.S. Treasurybill market.     

Real estate auctions: A survey of theory and practice

Recent downturns in real estate markets combined with a general acceptance of auctions have resulted in an unprecedented number of auction sales. A need therefore exists for the further development of real estate auction models that can provide insights into this emerging market institution. To facilitate this task a survey of auction theory as pertaining to its application in real estate markets is provided in this paper. Topics addressed includes bidding equilibria, the role of reserve prices, information disclosure, the decision to use auctions, bidder participation, and multiple-object sales. An overview of empirical studies in this area is also provided.     

When Less (Potential Demand) Is More (Revenue): Asymmetric Bidding Capacities in Divisible Good Auctions

We show that asymmetry in bidders’ capacity constraints plays an important role in inhibiting collusion and promoting competitive outcomes in multi-unit auctions in which the final value of the good is common knowledge. This effect appears to be related to the increased difficulty of coordination when there are significant differences between bidders. Due to its impact on collusive outcomes, asymmetry in bidding capacities has a more powerful impact on the seller’s revenue than does the auction type. Consistent with the finding in Sade et al. (2006) that the discriminatory auction is more susceptible to collusion than the uniform-price auction, asymmetry in capacity constraints has a greater impact in discriminatory auctions.We thank Emmanuel Morales-Camargo, Ira Luria and Yelena Larkin for their excellent research assistance. We have benefited from comments by Yishay Yafeh, Eugene Kandel, Dan Levin, David Genesove, Eric Hughson, Steve Rock, Peter Bossaerts, David McAdams two anonymous referees, participants at the 2005 International Meeting of the Economic Science Association in Montreal, the 2006 winter meeting of the Econometric Society in Boston, and seminar participants at the University of Cincinnati, Hebrew University, Federal Reserve Bank of Atlanta, Tel-Aviv University, the University of Notre Dame, and Ben-Gurion University. Sade thanks the Israel Science Foundation (ISF 480/05) and the Krueger Center for Finance at the Hebrew University of Jerusalem for partial financial support.     

Market Sentiments,Winner’s Curse and Bidding Outcome in Land Auctions

This paper empirically tests auction theory by examining how the stock market evaluates the outcome of open-bid English auctions of rights to develop residential real estate projects in Hong Kong. To do so, we deconstruct the complexity surrounding actual auction events, and empirically isolate the influence of conflicting auction theory predictions using data from expert opinion around auction events, actual auction event and outcome data, and stock market data. The empirical findings include (1) with increasing uncertainty bidders reduce bids, thus confirming predictions following the winner’s curse thesis; (2) joint bidding does not lead to increased bids based on pooled (“better”) information, but instead leads to reduced competition; while increased competition leads to increased prices at auction, as expected; (3) the market interprets auction outcomes as information events which function to signal developers’ expectations about future market prospects; but if the winning bid is considered too high, this interpretation is revised to that of the winner’s curse; (4) with joint bidding and winning, the market’s response to joint winners is better explained by concern for winner’s curse (despite supposed better informed bids) than the acquisition of a below cost development project following reduced competition at auction; and (5) the market interprets increased competition at auction as indicator of the future direction of property price movements in the secondary market—the more intense the competition, the more positive the future prospect of the property market are seen to be.     

Impact of the introduction of call auction on price discovery: Evidence from the Indian stock market using high-frequency data

Call markets are claimed to aggregate information and facilitate price discovery where continuous markets may fail. The impact of the introduction of call auction has not been found uniformly beneficial, possibly due to poor design or due to ‘thick market externalities’. This paper examines the reintroduction of opening call auction at the National Stock Exchange of India in 2010. The results suggest that the auctions attract very little volume, the intraday pattern of volume and volatility in the continuous market remains unchanged and a large fraction of price discovery, measured by the Weighted Price Contribution, still takes place in the first 15 min of continuous market. However, the market synchronicity has improved after the introduction of the auction. Our findings suggest that the ability to attract volume in the call auction for effective price discovery depends on the institutional settings and the characteristics of liquidity supply in the market.     

Procurement when price and quality matter

A buyer seeks to procure a good characterized by its price and its quality from suppliers who have private information about their cost structure (fixed cost and marginal cost of providing quality). We characterize the buyer's optimal buying mechanism. We then use the optimal mechanism as a theoretical and numerical benchmark to study simpler buying procedures such as scoring auctions and bargaining. Scoring auctions can extract a significant proportion of the buyer's strategic surplus (the difference between the expected utility from the optimal mechanism and the efficient auction). Bargaining does less well and often does worse than the efficient auction.     

Land Auctions with Budget Constraints

This paper tests for the effects of financial constraints on open-bid English land auction prices and bids. It is argued that bidders’ ability to pay, taken as capital resources and/or capital budget constraints, influence bids and final auction prices. While high capital resource developers may elect to bid more than optimal to win auctions, or bidders may elect to pool resources in joint bidding, budget constraints imposed by firm-specific financial variables on the other hand are expected to restrict bids. Land auction data in Hong Kong are used to test systematically these predictions. It is found that a firm’s age, the number of winners in a joint bid, and firm status in the market are positively related to prices, all factors which may be attributed to a firm’s ability to finance the auction price. Firm size, internal funds, financing cost, debt capacity and existing capital expenditure are also shown to affect bids submitted in land auctions: firm size and internal funds are positively related to bid prices; while constrained debt capacity, financing cost and existing capital expenditure lower bids. The results are consistent with predictions that a firm’s financial constraints, and thus its effect on capital budgets, are relevant factors in predicting land auction outcomes. More generally, these findings confirm that similar financial factors that constrain corporate capital investment also influence directly acquisition of assets at auctions.     

INFLUENCE OF TREASURY BILL FUTURES TRADING ON THE PRIMARY SALE OF THE DELIVERABLE TREASURY BILL

This paper investigates the impact of the presence of Treasury bill (T-bill) futures market contracts on the primary auction price of deliverable T-bills. Of the 52 weekly three- and six-month T-bill auctions, only four are deliverable against the T-bill futures market contract. This unique ability to deliver may command a premium price in the primary market. The results of this study support this hypothesis with regard to the six-month auction but are inconclusive with regard to the three-month auction. Furthermore, there is some evidence that the 1983 rule change making the one-year T-bill a deliverable instrument reduced the size of the premium in the six-month bill auction.     

Long-Lived Private Information and Imperfect Competition

We develop a multi-period auction model in which multiple privately informed agents strategically exploit their long-lived information. We show that such traders compete aggressively and cause most of their common private information to be revealed very rapidly. In the limit as the interval between auctions approaches zero, market depth becomes infinite and all private information is revealed immediately. These results are in contrast to those of Kyle (1985) in which the monopolistic informed trader causes his information to be incorporated into prices gradually, and, when the interval between auctions is vanishingly small, market depth is constant over time.     

Call auction algorithm design and market manipulation

It is commonly accepted that closing call auctions provide investors with access to closing prices, reduce volatility and reduce price manipulation. This paper argues that call auction design may influence the achievement of these objectives. The paper focuses on one aspect of call auction design, namely the matching algorithm used to set auction prices. Analysis of two real market cases indicates that different algorithms set different prices. The results also indicate that manipulation has a significant impact on call auction prices, with some algorithm designs more effective than others at reducing the impact of manipulation. Alternate call auction design features, such as volatility extensions, may be necessary to more effectively reduce closing price manipulation.     

Buy‐out prices in auctions: seller competition and multi‐unit demands

Online auction sites often enable sellers to add a buy‐out price. In one‐shot auctions, this has been motivated by appeal to impatience or risk aversion. We offer additional justification in a dynamic model, by showing that an early seller has an incentive to use a buy‐out price, if a similar product is offered later by another seller, and bidders desire multiple objects. Revenue in the first auction increases, but revenue in the second auction decreases, as does the sum of revenues. The buy‐out price causes the auction sequence to become inefficient, because the first item may be awarded to a bidder who should have received none.     

Not knowing the competition: evidence and implications for auction design

In a government auction program where first-price auctions generate significantly higher revenue than English auctions, I document evidence that bidders are uncertain about the number of auction entrants. Motivated by additional data evidence, I estimate a structural model of auctions in which rivals' participation is stochastic, allowing for bidders' risk aversion and asymmetry. Counterfactual simulations reveal that bidders' uncertainty about the number of entrants, combined with risk aversion, substantially softens the revenue impact of low competition in first-price auctions. This explains the observed revenue patterns and uncovers an empirically important reason for sellers to favor first-price auctions over English auctions.