Why Government Bonds Are Sold by Auction and Corporate Bonds by Posted-Price Selling

Michel A. Habib and Alexandre Ziegler
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Michel A. Habib: Swiss Banking Institute, University of Zurich
Alexandre Ziegler: Ecole des HEC, University of Lausanne and FAME

FAME Research Paper Series from International Center for Financial Asset Management and Engineering

Abstract: When information is costly, a seller may wish to prevent prospective buyers from acquiring information, for the cost of information acquisition is ultimately borne by the seller. A seller can achieve the desired prevention of information acquisition through posted-price selling, by offering prospective buyers a discount that is such as to deter them from gathering information. No such prevention is possible in the case of an auction. Clearly, a discount is costly to the seller. We establish the result that the seller prefers posted-price selling when the cost of information acquisition is high, and auctions when it is low. We view corporate bonds as an instance of the former case, and government bonds as an instance of the latter.

Keywords: Government Bonds; Corporate Bonds; Auctions; Posted-Price Selling; Costly Information (search for similar items in EconPapers)
JEL-codes: D44 G30 (search for similar items in EconPapers)
Date: 2003-03
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Citations: View citations in EconPapers (2)

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