Macroeconomic Dimensions of Public Finance: Essays in Honour of Vito Tanzi

By Mario I. Blejer; Teresa Ter-Minassian | Go to book overview
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We thank P. Clark, P. Dattels, R. Feldman, M. Guitián, D. Hardy, A. Ize, P. Martinez Mendez, and A. Prati, for comments and suggestions, and colleagues in the Monetary and Exchange Affairs Department and other departments of the IMF for help in collecting much of the information contained in the Appendix. We are responsible for errors and omissions. The views expressed in this chapter do not necessarily reflect those of the IMF.
See, for instance, McAfee and McMillan (1987), Milgrom (1989), Reinhart (1992), Feldman and Mehra (1993), and Bikhchandani and Huang (1993).
We thank Daniel Hardy for clarifying to us this point. See Wang (1993) for a general discussion of the advantages of different allocation mechanisms, and Bikhchandani and Huang (1993) for a discussion of the different informational content of sales on the primary and secondary markets of government securities.
Indeed, over-the-counter (or ‘tap’) sales of government securities were more common in the past than they are now. In these markets, the government revises security prices infrequently, in response to changes in underlying economic conditions, and to its acquisition of information on securities’ demand, gathered from buyers’ behavior at the counter.
The terms ‘correlated’ or ‘affiliated’ valuation have also been used in the literature to describe the general case of which private and common valuation are the polar cases—see Milgrom and Weber (1982a). We shall generally refer to ‘common-value’ auctions when discussing auctions with correlated values.
Other pricing rules used in actual auctions include setting the common auction price at the lowest accepted bid, or somewhere between the highest and lowest successful bids (e.g., at the quantity-weighted average of the successful bids). A close relative of competitive auctions is the ‘Vickrey auction, a sealed-bid auction in which each successful bidder pays for a j-th unit a price equal to the j-th highest rejected bid. With this auction format a winning bidder pays prices that are independent from his own bids, thus leading him to act as a price-taker. When each bidder desires a single unit, the Vickrey and the competitive formats coincide.
Note that the financial press usually refers to multiple-price/sealed-bid auctions as English auctions (except in the United Kingdom, where these auctions are known as American auctions), and to single-price/sealed-bid auctions as Dutch auctions. The text follows the classification adopted in the academic literature.
The strategic equivalence of Dutch and first-price auctions extends under conditions more general than Vickrey’s; in particular, it does not depend on the private-value assumption. This property is an important ingredient of Milgrom and Weber’s (1982a) analysis, discussed below.
See Milgrom and Weber (1982a, Section 8) and Harris and Raviv (1981). Chari and Weber (1992), however, argue that risk aversion should not be much of a problem in auctions of government securities, largely because no single auction is likely to be large relative to the wealth of actual and potential participants for a realistic degree of risk aversion.
See, in particular, Weber (1983), Maskin and Riley (1989), and Back and Zender (1992).
In open-outcry multiple-price auctions, for instance, the first bid received need not close the auction, as it would in single-object auctions; rather, it reveals useful information on this bidder’s valuation of the good on sale. This feature is likely to reduce the impact of the winner’s curse in these auctions with respect to their sealed-bid counterparts.
For instance, Back and Zender (1992) provide some examples of auctions with


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Macroeconomic Dimensions of Public Finance: Essays in Honour of Vito Tanzi
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