Rationing rules and European Central Bank auctions

Abstract

Theoretical analyses of multi-unit auctions tend to side-step the importance of rationing rules by assuming strictly decreasing aggregate demand. However, under European Central Bank rules, bidders are allowed to submit no more than ten price–quantity pairs. So even if the underlying demand is strictly decreasing, it is likely that several bidders may submit a market-clearing bid. If at the market-clearing bid, excess demand exists, it is necessary to ration how much each bidder receives. The effect on bidding behavior and equilibrium revenues under two distinct rationing rules is explored in this paper.