How to Sell Public Debt in Uncertain Times

Speaker:  Daniel Neuhann, McCombs School of Business at UT Austin

Location: online or at Kiel Institute for the World Economy, Chausseestraße 111, 10115 Berlin

Organizers: Kiel Institute for the World Economy, CEPR

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Abstract: How should governments structure primary sovereign bond markets when investors face asymmetric uncertainty about default risk and total demand? Standard protocols either use uniform prices for all investors, or price discriminate based on bid prices (“pay as bid”). Uniform pricing encourages more bidding by uninformed in-vestors but price discrimination captures inframarginal surplus. Based on this trade-off, we propose a protocol that features price discrimination on inframarginal bids and uniform pricing on marginal bids, thereby reducing the mean and variance of public borrowing costs. We also offer new evidence on the information content of primary bond markets which supports our framework.