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Common-Value Auctions with Liquidity Needs: An Experimental Test of a Troubled Assets Reverse Auction

We experimentally test alternative auction designs suitable for pricing and removing troubled assets from banks’ balance sheets as part of the financial rescue. Many individual securities or pools of securities are auctioned simultaneously. Securities that are widely held are purchased in auctions for individual securities. Securities with concentrated ownership are purchased as pools of related securities. Each bank has private information about its liquidity need and the true common value of each security. We study bidding behavior and performance of sealed-bid uniform-price auctions and dynamic clock auctions. The clock and sealed-bid auctions resulted in similar prices. However, the clock auctions resulted in substantially higher bank payoffs, since the dynamic auction enabled the banks to better manage their liquidity needs. The clock auctions also reduced bidder error. The experiments demonstrated the feasibility of quickly implementing simple and effective auction designs to help resolve the crisis.

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File URL: http://www.cramton.umd.edu/papers2005-2009/acfhos-common-value-auctions-with-liquidity-needs.pdf
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Paper provided by University of Maryland, Department of Economics - Peter Cramton in its series Papers of Peter Cramton with number 09cvawln.

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Length: 103 pages
Date of creation: 2009
Date of revision: 2012
Publication status: Published in Handbook of Market Design, Zvika Neeman, Al Roth, and Nir Vulkan (eds), Oxford University Press. January 2013
Handle: RePEc:pcc:pccumd:09cvawln
Contact details of provider: 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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