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Underwriting Government Debt Auctions: Auction Choice and Information Production

Author

Listed:
  • Sudip Gupta

    (Gabelli School of Business, Fordham University, New York, New York 10023)

  • Rangarajan K. Sundaram

    (Stern School of Business, New York University, New York, New York 10012)

  • Suresh Sundaresan

    (Graduate School of Business, Columbia University, New York, New York 10027)

Abstract

In this paper, we examine a novel two-stage mechanism for selling government securities, wherein the dealers underwrite in the first stage the sale of securities, which are auctioned in stage 2 via either a discriminatory auction (DA) or a uniform price auction (UPA). Using proprietary data on auctions during 2006–2013, we find that (a) the first stage underwriting auction generates significant information, including predicting the likelihood of devolvement, and bid shading, and (b) the outcome of the underwriting auction may generate enough asymmetry amongst bidders that may make DA dominate UPA in certain counterfactual situations. We document that the unique two-stage auction design provides a market-driven mechanism to simultaneously insure against auction failures and produce information about the quality of the underlying issue.

Suggested Citation

  • Sudip Gupta & Rangarajan K. Sundaram & Suresh Sundaresan, 2021. "Underwriting Government Debt Auctions: Auction Choice and Information Production," Management Science, INFORMS, vol. 67(5), pages 3127-3149, May.
    • Handle: RePEc:inm:ormnsc:v:67:y:2021:i:5:p:3127-3149
    DOI: 10.1287/mnsc.2019.3565
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    References listed on IDEAS

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    1. Klingler, Sven & Sundaresan, Suresh, 2023. "Diminishing treasury convenience premiums: Effects of dealers’ excess demand and balance sheet constraints," Journal of Monetary Economics, Elsevier, vol. 135(C), pages 55-69.

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