Common-Value Auctions with Liquidity Needs: An Experimental Test of a Troubled Assets Reverse Auctions

Emel Filiz Ozbay, Lawrence M. Ausubel, Peter Cramton, Nathaniel Higgins, Erkut Y. Ozbay, and Andrew Stocking , Handbook of Market Design, ed. by Nir Vulkan, Alvin E. Roth, and Zvika Neeman , May 2011.

We report the results of an experimental test of alternative auction designs suitable for pricing and removing troubled assets from banks’ balance sheets as part of the financial rescue planned by the U.S. Department of Treasury in the fall of 2008. All auction mechanisms tested here are structured so that 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 experimental subject represents a bank which 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