Designing effective auctions for treasury securities

Most discussions of treasury auction design focus on the choice between two methods for issuing securities—uniform-price or discriminatory auctions. Although auction theory and much recent research appear to favor the uniform-price method, most countries conduct their treasury auctions using the discriminatory format. What are the main issues underlying the debate over effective auction design? The widespread growth of public debt in industrial countries in the 1980s has intensif ied policymakers’ concern with implementing effective methods to sell government securities. Treasury auctions—in which a government sells securities to finance its debt—are a natural, but often overlooked, candidate for institutional reform. By broadening participation in treasury auctions and increasing auction revenues, governments could potentially save millions of dollars. Consider, for example, the savings that might be realized by a country auctioning $1 trillion of securities annually. (In recent years, the U.S. Treasury has auctioned more than $2 trillion of marketable securities annually.) If a more cost-effective design could be identified and adopted, each 0.01 percent reduction in auction yields achieved through the design change would lower that country’s annual federal deficit by more than $100 million. In this edition of Current Issues, we examine the two main auction methods in use today to issue treasury securities—discriminatory and uniform-price auctions. Drawing on the theory of auction design and the empirical findings of earlier researchers, we discuss the revenue potential of these two auction methods and their vulnera-bility to noncompetitive behavior by bidders. We then compare researchers ’ views of the two methods with the actual practices of forty-two countries holding auctions of treasury securities. Surprisingly, while much of the lit-erature suggests that uniform-price auctions may out-perform discriminatory auctions in producing revenues for treasuries and limiting the scope for noncompetitive behavior, most countries conduct their treasury auctions using the more traditional discriminatory format. This split between theory and practice is likely to lead to increased experimentation with new auction formats in the next several years.