Divisible-Good Auctions: The Role of Allocation Rules

Ilan Kremer () and Kjell Nyborg
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Ilan Kremer: Stanford University

RAND Journal of Economics, 2004, vol. 35, issue 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.

Date: 2004
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