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Divisible good auctions: the role of allocation rules


Kremer, Ilan; Nyborg, Kjell G (2004). Divisible good auctions: the role of allocation rules. Rand Journal of Economics, 35(1):147-159.

Abstract

We examine the role of allocation rules in determining the set of equilibrium prices in uniform- price auctions. Beginning with Wilson (1979), the theoretical literature has argued that these auctions are subject to possible low equilibrium prices. We show that this is due to the way the asset is being divided. We focus on allocation rules that specify the way the asset is divided in cases of excess demand. This may have a dramatic effect on the set of equilibrium prices. In particular, we show that a simple allocation rule (pro rata) eliminates underpricing, while the allocation rule used in practice has a negative effect on equilibrium prices.

We examine the role of allocation rules in determining the set of equilibrium prices in uniform- price auctions. Beginning with Wilson (1979), the theoretical literature has argued that these auctions are subject to possible low equilibrium prices. We show that this is due to the way the asset is being divided. We focus on allocation rules that specify the way the asset is divided in cases of excess demand. This may have a dramatic effect on the set of equilibrium prices. In particular, we show that a simple allocation rule (pro rata) eliminates underpricing, while the allocation rule used in practice has a negative effect on equilibrium prices.

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39 citations in Web of Science®
33 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:1 April 2004
Deposited On:21 May 2015 10:34
Last Modified:05 Apr 2016 19:14
Publisher:The RAND Corporation, in conjunction with Blackwell Publishing.
ISSN:0741-6261
Publisher DOI:https://doi.org/10.2307/1593734
Official URL:http://www.jstor.org/stable/1593734?seq=1#page_scan_tab_contents
Related URLs:https://editorialexpress.com/cgi-bin/rje_online.cgi?action=view&year=2004&issue=spr&page=147&&tid=121259&sc=8NIA4zbE
Other Identification Number:merlin-id:11966
Permanent URL: https://doi.org/10.5167/uzh-110682

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