A Walrasian Theory of Sovereign Debt Auctions with Asymmetric Information

Abstract

How does investors' information about a country's fundamentals, and the fact that this information may be asymmetrically held, affect a country's financing cost? Motivated by this question, and by the observation that sovereign bonds are usually auctioned in large lots to a large number of potential investors, we develop a novel model of auctions with asymmetric information that relies on price-taking and rational expectations. We first characterize sovereign bond prices for different degrees of asymmetric information under two commonly-used protocols: discriminatory-price auctions and uniform-price auctions. We show that there is trade-off between these protocols if information is sufficiently asymmetric: expected bond yields are higher when pricing is discriminatory, but yield volatility is higher when pricing is uniform. We then study endogenous information acquisition and find that (i) discriminatory auctions may display multiple welfare-ranked informational equilibria, and (ii) investors are less likely to acquire information in uniform auctions.