Abstract
Before an auction, public debt managers (DMs) announce the number of bonds to be sold to primary dealers (PDs); however, the empirical evidence suggests that when “beat-the-market” opportunities arise, more bonds than announced are auctioned. A micro foundation for this result resides in PDs’ sale of bonds to uninformed traders, thereby extracting information rents. These rents give rise to two counteracting effects. On the one hand, they create an auction premium that motivates DMs to overissue. On the other hand, they motivate traders to learn the bond value, which increases market expertise, mitigating the auction premium and issuance bias. A credible announcement policy raises welfare by increasing the auction premium, depressing the issuance bias, and reducing traders’ need to invest in market expertise.
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