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Auctioning Securities

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Abstract

Treasury debt and other divisible securities are traditionally sold in either a pay-your-bid (discriminatory) auction or a uniform-price auction. We compare these auction formats with a Vickrey auction and also with two ascending-bid auctions. The Vickrey auction and the alternative ascending-bid auction (Ausubel 1996) have important theoretical advantages for sellers. In a setting without private information, these auctions achieve the maximal revenue as a unique equilibrium in dominant strategies. In contrast, the pay- your-bid, uniform-price, and standard ascending-bid auction admit a multiplicity of equilibria that yield low revenues for the seller. We show how these results extend to a setting where bidders have affiliated private information. Our results question the standard ways that securities are offered to the public.

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File URL: http://www.cramton.umd.edu/papers1995-1999/98wp-auctioning-securities.pdf
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Bibliographic Info

Paper provided by University of Maryland, Department of Economics - Peter Cramton in its series Papers of Peter Cramton with number 98wpas.

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Length: 15 pages
Date of creation: Feb 1997
Date of revision: Mar 1998
Handle: RePEc:pcc:pccumd:98wpas

Note: Working Paper
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Postal: Economics Department, University of Maryland, College Park, MD 20742-7211
Phone: (202) 318-0520
Fax: (202) 318-0520
Web page: http://www.cramton.umd.edu

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Keywords: Auctions; Multi-Unit Auctions; Security Auctions; Treasury Auctions;

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References

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  1. Noussair, C.N., 1995. "Equilibria in a multi-object uniform price sealed bid auction with multi-unit demands," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-381122, Tilburg University.
  2. Smith, Vernon L, 1982. "Microeconomic Systems as an Experimental Science," American Economic Review, American Economic Association, American Economic Association, vol. 72(5), pages 923-55, December.
  3. Harstad, Ronald M, 1990. "Alternative Common-Value Auction Procedures: Revenue Comparisons with Free Entry," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(2), pages 421-29, April.
  4. Bulow, Jeremy I & Klemperer, Paul, 1994. "Auctions vs. Negotiations," CEPR Discussion Papers, C.E.P.R. Discussion Papers 924, C.E.P.R. Discussion Papers.
  5. Rothkopf, Michael H & Teisberg, Thomas J & Kahn, Edward P, 1990. "Why Are Vickrey Auctions Rare?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(1), pages 94-109, February.
  6. Richard Engelbrecht-Wiggans & Charles M. Kahn, 1998. "Multi-unit auctions with uniform prices," Economic Theory, Springer, Springer, vol. 12(2), pages 227-258.
  7. Robert J. Weber, 1981. "Multiple-Object Auctions," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 496, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Avery, Christopher, 1998. "Strategic Jump Bidding in English Auctions," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 65(2), pages 185-210, April.
  9. Levin, Dan & Smith, James L, 1994. "Equilibrium in Auctions with Entry," American Economic Review, American Economic Association, American Economic Association, vol. 84(3), pages 585-99, June.
  10. Bikhchandani, Sushil, 1999. "Auctions of Heterogeneous Objects," Games and Economic Behavior, Elsevier, Elsevier, vol. 26(2), pages 193-220, January.
  11. William Vickrey, 1961. "Counterspeculation, Auctions, And Competitive Sealed Tenders," Journal of Finance, American Finance Association, American Finance Association, vol. 16(1), pages 8-37, 03.
  12. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, Econometric Society, vol. 50(5), pages 1089-1122, September.
  13. Levin, Dan & Smith, James L, 1996. "Optimal Reservation Prices in Auctions," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 106(438), pages 1271-83, September.
  14. Engelbrecht-Wiggans, Richard, 1988. "Revenue equivalence in multi-object auctions," Economics Letters, Elsevier, Elsevier, vol. 26(1), pages 15-19.
  15. V.V. Chari & Robert J. Weber, 1992. "How the U.S. Treasury should auction its debt," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-12.
  16. Back, Kerry & Zender, Jaime F, 1993. "Auctions of Divisible Goods: On the Rationale for the Treasury Experiment," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 6(4), pages 733-64.
  17. Lawrence M. Ausubel & Peter Cramton, 1995. "Demand Reduction and Inefficiency in Multi-Unit Auctions," Papers of Peter Cramton, University of Maryland, Department of Economics - Peter Cramton 98wpdr, University of Maryland, Department of Economics - Peter Cramton, revised 22 Jul 2002.
  18. Wilson, Robert, 1979. "Auctions of Shares," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 93(4), pages 675-89, November.
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Citations

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Cited by:
  1. Kjell Sunnevåg, 2003. "Auction Design for the Allocation of Emission Permits in the Presence of Market Power," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 26(3), pages 385-400, November.
  2. Sara Castellanos, 2001. "Mexican treasury securities primary auctions," Theory workshop papers, UCLA Department of Economics 357966000000000025, UCLA Department of Economics.
  3. Marco LiCalz & Alessandro Pavan, 2002. "Tilting the Supply Schedule to Enhance Competition on Uniform-Price Auctions," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1495, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Robert Wright, 2002. "Reforming the US IPO market: lessons from history and theory," Accounting History Review, Taylor & Francis Journals, Taylor & Francis Journals, vol. 12(3), pages 419-437.
  5. Xue Wang, 2012. "Comparison of two parameterizations of the winner's curse model in a sample of Swedish Treasury auctions," International Journal of Accounting and Information Management, Emerald Group Publishing, Emerald Group Publishing, vol. 20(2), pages 100-113.
  6. Gresik, Thomas A., 2001. "Rationing rules and European Central Bank auctions," Journal of International Money and Finance, Elsevier, Elsevier, vol. 20(6), pages 793-808, November.
  7. Daripa, Arupratan, 2001. "A theory of treasury auctions," Journal of International Money and Finance, Elsevier, Elsevier, vol. 20(6), pages 743-767, November.
  8. Peter Cramton, 1998. "Ascending Auctions," Papers of Peter Cramton, University of Maryland, Department of Economics - Peter Cramton 98eer, University of Maryland, Department of Economics - Peter Cramton, revised 28 Jul 1998.
  9. Lawrence M. Ausubel & Peter Cramton, 1995. "Demand Reduction and Inefficiency in Multi-Unit Auctions," Papers of Peter Cramton, University of Maryland, Department of Economics - Peter Cramton 98wpdr, University of Maryland, Department of Economics - Peter Cramton, revised 22 Jul 2002.
  10. Klaus Abbink & Jordi Brandts & Paul Pezanis-Christou, 2002. "Auctions for Government Securities: A Laboratory Comparison of Uniform, Discriminatory and Spanish Designs," UFAE and IAE Working Papers, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) 551.02, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  11. Naoki Kojima, 2007. "IPO share allocation and conflicts of interest," Annals of Finance, Springer, Springer, vol. 3(3), pages 369-387, July.
  12. Lawrence M. Ausubel & Peter Cramton & Paul Milgrom, 2012. "System and Method for a Hybrid Clock and Proxy Auction," Papers of Peter Cramton, University of Maryland, Department of Economics - Peter Cramton 10acmhc, University of Maryland, Department of Economics - Peter Cramton, revised 2012.
  13. Sara Castellanos, 2001. "A New Empirical Study of the Mexican Treasury Securities Primary Auctions: Is there more underpricing?," Levine's Working Paper Archive 625018000000000206, David K. Levine.
  14. Preget, Raphaele & Waelbroeck, Patrick, 2005. "Treasury bill auction procedures: Empirical perspectives from French market bid functions," Journal of International Money and Finance, Elsevier, Elsevier, vol. 24(7), pages 1054-1072, November.
  15. Sunnevåg, Kjell J., 2001. "Auction design for the allocation of multiple units of a homogenous good: Theoretical background and practical experience," University of California at Santa Barbara, Economics Working Paper Series qt6wh704p7, Department of Economics, UC Santa Barbara.
  16. Bennouri, Moez & Gimpel, Henner & Robert, Jacques, 2011. "Measuring the impact of information aggregation mechanisms: An experimental investigation," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 78(3), pages 302-318, May.
  17. Schnitzlein, Charles R. & Shao, Minjie, 2013. "Capacity constraints and the winner's curse in multi-unit common value auctions," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 53(2), pages 188-201.

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