A Walrasian Theory of Sovereign Debt Auctions with Asymmetric Information (with Hal Cole and Dan Neuhann)

Abstract: Sovereign bonds are highly divisible, usually of uncertain quality, and auctioned in large lots to a large number of investors. As no individual bidder can affect the bond price, we 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.