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Unpublished Paper
Common-Value Auctions with Liquidity Needs: An Experimental Test of a Troubled Assets Reverse Auction
Working Paper, University of Maryland (2008)
  • Peter Cramton, University of Maryland
  • Lawrence M. Ausubel, University of Maryland
  • Emel Feliz-Ozbay, University of Maryland
  • Nathaniel Higgins, University of Maryland
  • Erkut Ozbay, University of Maryland
  • Andrew Stocking, University of Maryland
Abstract

We experimentally test alternative auction designs suitable for pricing and removing troubled assets from banks’ balance sheets as part of the financial rescue. Many individual securities or pools of securities are auctioned simultaneously. Securities that are widely held are purchased in auctions for individual securities. Securities with concentrated ownership are purchased as pools of related securities. Each bank has private information about its liquidity need and the true common value of each security. We study bidding behavior and performance of sealed-bid uniform-price auctions and dynamic clock auctions. The clock and sealed-bid auctions resulted in similar prices. However, the clock auctions resulted in substantially higher bank payoffs, since the dynamic auction enabled the banks to better manage their liquidity needs. The clock auctions also reduced bidder error. The experiments demonstrated the feasibility of quickly implementing simple and effective auction designs to help resolve the crisis.

Publication Date
December, 2008
Citation Information
Peter Cramton, Lawrence M. Ausubel, Emel Feliz-Ozbay, Nathaniel Higgins, et al.. "Common-Value Auctions with Liquidity Needs: An Experimental Test of a Troubled Assets Reverse Auction" Working Paper, University of Maryland (2008)
Available at: http://works.bepress.com/astocking/1/