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Published November 2013 | Supplemental Material + Published
Journal Article Open

A Procurement Auction for Toxic Assets with Asymmetric Information

Abstract

The proposed 2008 TARP auction was intended to remove "toxic" assets from portfolios of financially stressed banks. The Treasury selected a design whereby bids to sell different securities would be normalized by "reference prices" that reflect relative value estimates. We conduct a series of experiments indicating that a simple Reference Price Auction can be an effective mechanism for avoiding serious effects of adverse selection and strategic bid manipulation, even with inaccurate reference prices. Beyond the TARP auction, our results are relevant to various multi-object auctions with value heterogeneity.

Additional Information

© 2013 American Economic Association. We wish to thank Claudia Antonacci, Andrew Barr, Rachel Blank, Anne Dragnova, Sara St. Hilaire, Stephanie Lawrence, Courtney Mallow, Karl Schurter, and Sean Sullivan for research assistance. We also thank seminar and conference participants at the 2009 Workshop on Neuroeconomics and Psychology in Toulouse, the 2009 Public Economic Conference in Lyon, the 2009 ESA meeting in Tucson, the 2010 ESA meeting in Melbourne, the University of Technology in Sydney, and the LeeX International Conference on Theoretical and Experimental Macroeconomics. We are grateful to Jamie McAndrews and Kenneth Garbade for helpful comments. This research was supported in part by the University of Virginia Bankard Fund for Political Economy, and by the CIRANO lab in Montréal, where some of the experiment sessions were conducted. Along with Treasury staff, other Federal Reserve employees, and other auction experts from academia, the authors were part of the team set up by the US Treasury in the fall of 2008 that designed an auction to purchase mortgage related assets. The views expressed here are those of the authors and do not reflect the views of the US Treasury or the views of other members of that "Treasury team." Likewise, the views expressed here do not necessarily reflect the views of the Federal Reserve Bank of New York or the Federal Reserve System.

Attached Files

Published - mic.5.4.142.pdf

Supplemental Material - 2011-0116_app.pdf

Supplemental Material - 2011-0116_data.zip

Supplemental Material - 2011-0116_ds.zip

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