A Walrasian Theory of Sovereign Debt Auctions with Asymmetric Information

59 Pages Posted: 11 Nov 2017

See all articles by Harold L. Cole

Harold L. Cole

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Daniel Neuhann

University of Texas at Austin, McCombs School of Business

Guillermo Ordoñez

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: October 2017

Abstract

Sovereign bonds are highly divisible, usually of uncertain quality, and auctioned in large lots to a large number of investors. This leads us to assume that no individual bidder can affect the bond price, and to develop a tractable Walrasian theory of Treasury auctions in which investors are asymmetrically informed about the quality of the bond. We characterize the price of the bond for different degrees of asymmetric information, both under discriminatory-price (DP) and uniform-price (UP) protocols. We endogenize information acquisition and show that DP protocols are likely to induce multiple equilibria, one of which features asymmetric information, while UP protocols are unlikely to sustain equilibria with asymmetric information. This result has welfare implications: asymmetric information negatively affects the level, dispersion and volatility of sovereign bond prices, particularly in DP protocols.

Suggested Citation

Cole, Harold L. and Neuhann, Daniel and Ordoñez, Guillermo, A Walrasian Theory of Sovereign Debt Auctions with Asymmetric Information (October 2017). PIER Working Paper No. 17-015. Available at SSRN: https://ssrn.com/abstract=3008780 or http://dx.doi.org/10.2139/ssrn.3008780

Harold L. Cole (Contact Author)

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Daniel Neuhann

University of Texas at Austin, McCombs School of Business ( email )

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Guillermo Ordoñez

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
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National Bureau of Economic Research (NBER) ( email )

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