Treasuries all over the world sell sovereign bonds through an auction which is typically conducted by the central bank. When volatility in financial markets is high, auctions may fail to elicit the true price of the bond. To study the impact of increased uncertainty on bidder behavior in treasury auctions, we introduce (a) risk averse preferences and (b) common uncertainty in the valuation of the underlying security. Using detailed bid-level data on the Indian Treasury Bill market around the (in)famous episode called taper tantrum, we estimate bidders' valuations in a model of multi-unit discriminatory price auction. We find that average bid shading increases substantially during this period leading to a big loss to the exchequer. A large part of the increase in bid shade is explained by the rise in uncertainty as measured by activity in the secondary market. We also uncover systematic heterogeneity across bidders. While some bidders bid at low prices because their valuations are low, others bid less as a strategic response to the increased uncertainty. We evaluate two alternative selling mechanisms - uniform price auction and a fixed price tender. We find that switching the pricing rule to uniform does not reduce bidder surplus. A fixed price mechanism, on the other hand, can help stabilize the market without affecting revenue much.
Pivotal Persuasion, with Jimmy Chang, Fei Li and Yun Wang
Revise and Resubmit, Journal of Economic Theory.
We study a Bayesian persuasion game between a sender and a group of voters. The sender is restricted to using only minimal winning coalitions. We show that the sender sends private and correlated signals to take advantage of the voters' heterogenous preferences. The optimal persuasion structure induces multiple winning coalitions for the sender's preferred action. Interestingly, some of the winning coalitions involves voters who are not the easiest to persuade.
Work in Progress
Whither Design? Whither Dynamics: On Framework and Frequency of Treasury Auctions, with Rohit Lamba
First Price Auctions with Risk Averse Bidders and Common Uncertainty, with Rohit Lamba and Oleg Muratov.