Bidding Behavior in Discriminatory Auctions with Underwriting Commissions: Theory and Evidence from the Japanese Government Bond Market

Abstract

In multi-unit auctions where securities are sold, sellers give benefits to successful bidders by discounting the bids or paying underwriting commissions. We analyze a discriminatory auction in which underwriting commissions are paid to successful bidders. We show that in theory, successful bidders earn profits from underwriting commissions. Moreover, we quantify successful bidders' profits from underwriting commissions using a policy change in Japan's ten-year government bond auctions. The estimation results suggest that the annual profit for successful bidders from the commissions was about USD $ 760 million. However, the results also indicate that the presence of underwriting commissions intensified competition in auctions.