Underwriting Government Debt Auctions: Auction Choice and Information Production

In this paper, we examine a novel two-stage mechanism for selling government securities, wherein the dealers underwrite in the first stage the sale of securities, which are auctioned in stage 2 via either a discriminatory auction (DA) or a uniform price auction (UPA). Using proprietary data on auctions during 2006–2013, we find that (a) the first stage underwriting auction generates significant information, including predicting the likelihood of devolvement, and bid shading, and (b) the outcome of the underwriting auction may generate enough asymmetry amongst bidders that may make DA dominate UPA in certain counterfactual situations. We document that the unique two-stage auction design provides a market-driven mechanism to simultaneously insure against auction failures and produce information about the quality of the underlying issue. This paper was accepted by Karl Diether, finance.