Vulnerability of Fixed-Rate Funds-Supplying Operations to Overbidding: An Experimental Approach

This paper experimentally investigates overbidding in the fixed-rate funds-supplying operations conducted by central banks. One motivation for this is that while the European Central Bank had experienced severe overbidding in the conduct of its fixed-rate operations, no comparable behavior has been observed for the Bank of Japan. Existing theoretical analyses argue that this is because the currently accommodative financial environment in Japan has made bidders' objective functions locally satiated, and this contributes to the avoidance of overbidding. To investigate this further, we conduct an experiment with fixedrate operations, the results of which are as follows. When participants' initial demands are sufficiently small, they simply play the unique Nash equilibrium strategy to bid their true demand. Further, as demand increases and there is no satiation in their objective functions, participants tend to overbid. However, even as demand becomes larger, an explosion of bids does not arise if the objective functions are sufficiently satiated. We also estimate the subject bid functions from the experimental data affected by the degree of satiation and reveal that a simple calibration points to the vulnerability of fixed-rate operations to overbidding, even when satiation is preserved.