Why Government Bonds are Sold by Auction and Corporate Bonds by Posted-price Selling
Michel A. Habib
University of Zurich; Swiss Finance Institute
University of Zurich - Swiss Banking Institute (ISB); Swiss Finance Institute
FAME Research Paper No. 78
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.
Number of Pages in PDF File: 37
Keywords: Government Bonds, Corporate Bonds, Auctions, Posted-price Selling, Costly Information
JEL Classification: D44, G30working papers series
Date posted: July 31, 2003
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