Why Government Bonds are Sold by Auction and Corporate Bonds by Posted-Price Selling

FAME Research Paper No. 78

37 Pages Posted: 31 Jul 2003

See all articles by Michel A. Habib

Michel A. Habib

University of Zurich; Swiss Finance Institute

Alexandre Ziegler

University of Zurich - Department of Banking and Finance

Date Written: March 2003

Abstract

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.

Keywords: Government Bonds, Corporate Bonds, Auctions, Posted-price Selling, Costly Information

JEL Classification: D44, G30

Suggested Citation

Habib, Michel A. and Ziegler, Alexandre, Why Government Bonds are Sold by Auction and Corporate Bonds by Posted-Price Selling (March 2003). FAME Research Paper No. 78, Available at SSRN: https://ssrn.com/abstract=410728 or http://dx.doi.org/10.2139/ssrn.410728

Michel A. Habib

University of Zurich ( email )

Plattenstrasse 14
Zurich, 8032
Switzerland
41-44-634-2507 (Phone)
41-44-634-4903 (Fax)

HOME PAGE: http://www.isb.uzh.ch/institut/profs/mhabib.htm

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Alexandre Ziegler (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Z├╝rich, 8032
Switzerland

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