Abstract
Richard West (1965) and Reuben Kessel (1971) have both reported that on new issues of taxexempt securities the issuer's interest costs decline sharply as the number of bidders increases. Moreover, they also agree that this reduction in the bid yield is primarily reflected in a decline in the yield to maturity at which the bonds are offered to the public rather than a decline in the underwriter's spread between the bid and offer yields. 1 However, the two studies differ regarding the level at which an additional bid ceases to affect the bid yield. West (1965) argued that the higher yields on issues which received only one or two bids represented monopsony pricing and found no evidence that additional bids beyond the third would lower the interest rate. On the other hand, Kessel (1971) argued that additional bids represent a more intensive search for the underwriting syndicate that can sell the issue at the lowest rate. Since underwriters serve different customThis paper examines the relationship between the number of bidders for a contract and the resulting price. Attention is focused on the bidding for new bond issues. The theory of order statistics is used to analyze the theoretical magnitude of the sampling or search effect of an additional bidder. A simple model of the bidder's bid decision is then utilized to examine the competitive impact on individual bidders. After previous studies of the municipal bond market by West and Kessel are carefully reviewed, evidence for the corporate bond market is presented.
Published Version
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