Auctions with Liquidity Subsidies

Abstract

This paper proposes liquidity subsidies for improving allocative efficiency and price discovery in multi-unit auctions. In the proposed subsidy scheme, the market administrator divides some amount of subsidy revenue between agents proportional to their marginal contribution to the slope of auction aggregate demand at the equilibrium price. These subsidies cause agents to bid more aggressively, increasing the slopes of their submitted bid curves. This decreases bid shading, increases allocative efficiency, and lowers the variance of auction prices.

Keywords: Auctions

JEL Classification: D4