This paper addresses the issue of the choice of the optimal instrument to sell new shares, this choice being price versus quantity discrimination (rationing). Previous results in the literature (Benveniste and Wilhelm, 1990) show that the issuing firm would be better off if allowed to use both price and quantity discrimination. This is not consistent with what we observe in practice. Using a mechanism design approach, we derive endogenously the optimal IPO mechanism and show that it can be implemented through a uniform price across institutional investors and a uniform rationing, when appropriate.
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