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Why Government Bonds Are Sold by Auction and Corporate Bonds by Posted-Price Selling

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Author Info

  • Michel A. Habib

    (Swiss Banking Institute, University of Zurich)

  • Alexandre Ziegler

    (Ecole des HEC, University of Lausanne and FAME)

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    Abstract

    When information is costly, a seller may wish to prevent prospective buyers from acquiring information, for the cost of information acquisition is ultimately borne by the seller. A seller can achieve the desired prevention of information acquisition through posted-price selling, by offering prospective buyers a discount that is such as to deter them from gathering information. No such prevention is possible in the case of an auction. Clearly, a discount is costly to the seller. We establish the result that the seller prefers posted-price selling when the cost of information acquisition is high, and auctions when it is low. We view corporate bonds as an instance of the former case, and government bonds as an instance of the latter.

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    Bibliographic Info

    Paper provided by International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number rp78.

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    Date of creation: Mar 2003
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    Handle: RePEc:fam:rpseri:rp78

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    Related research

    Keywords: Government Bonds; Corporate Bonds; Auctions; Posted-Price Selling; Costly Information;

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    References

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    1. Milgrom, Paul R, 1981. "Rational Expectations, Information Acquisition, and Competitive Bidding," Econometrica, Econometric Society, vol. 49(4), pages 921-43, June.
    2. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
    3. Levin, Dan & Smith, James L, 1994. "Equilibrium in Auctions with Entry," American Economic Review, American Economic Association, vol. 84(3), pages 585-99, June.
    4. Harstad, Ronald M, 1990. "Alternative Common-Value Auction Procedures: Revenue Comparisons with Free Entry," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 421-29, April.
    5. Smith, Clifford Jr., 1986. "Investment banking and the capital acquisition process," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 3-29.
    6. Nyborg, Kjell G. & Sundaresan, Suresh, 1996. "Discriminatory versus uniform Treasury auctions: Evidence from when-issued transactions," Journal of Financial Economics, Elsevier, vol. 42(1), pages 63-104, September.
    7. Kagel, John H & Levin, Dan & Harstad, Ronald M, 1995. "Comparative Static Effects of Number of Bidders and Public Information on Behavior in Second-Price Common Value Auctions," International Journal of Game Theory, Springer, vol. 24(3), pages 293-319.
    8. Ruqu Wang, 1991. "Auctions Versus Posted-Price Selling," Working Papers 812, Queen's University, Department of Economics.
    9. Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 187-212.
    10. French, Kenneth R & McCormick, Robert E, 1984. "Sealed Bids, Sunk Costs, and the Process of Competition," The Journal of Business, University of Chicago Press, vol. 57(4), pages 417-41, October.
    11. Levin, Dan & Harstad, Ronald M., 1986. "Symmetric bidding in second-price, common-value auctions," Economics Letters, Elsevier, vol. 20(4), pages 315-319.
    12. Matti Keloharju & Kjell G. Nyborg & Kristian Rydqvist, 2003. "Strategic Behavior and Underpricing in Uniform Price Auctions," Working Papers 2003.25, Fondazione Eni Enrico Mattei.
    13. Ruqu Wang, 1998. "Auctions versus Posted-Price Selling: The Case of Correlated Private Valuations," Canadian Journal of Economics, Canadian Economics Association, vol. 31(2), pages 395-410, May.
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    Cited by:
    1. Ravi Jagannathan & Ann E. Sherman, 2006. "Why Do IPO Auctions Fail?," NBER Working Papers 12151, National Bureau of Economic Research, Inc.

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