A Walrasian Theory of Sovereign Debt Auctions with Asymmetric Information

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.

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Paper Number
17-015
Year
2017