A theory of treasury auctions

Abstract

I study a model of treasury auctions incorporating some of the important institutional features. A treasury auction is a repeated multi-unit common-value auction in which bidders bid demand functions. Another important auction with similar features is the variable-rate tender repo auction conducted by the European Central Bank. I discuss the appropriateness of the treasury auction model for analyzing repo auctions. Rankings based on differences in one-shot collusion opportunities among auctions with no entry are found in the literature. These are possibly inappropriate for treasury auctions which take place at regular intervals, and allow entry. I present a repeated auctions framework with a group of informed bidders, and free entry by uninformed outsiders. I restrict attention to the class of equilibria that satisfy a ‘no-arbitrage’ (no profitable entry by an uninformed outsider) constraint, and rank discriminatory (pay-your-bid) and uniform-price auctions by revenue generated in the equilibria that are most favorable to informed bidders. The main contribution of the paper is a ranking of Treasury revenue across a variety of institutional set-ups, and the implied policy prescriptions.