On Underpricing in Share Auctions

Finance

IFA Working Paper

1997

NOW REVISED AS IFA 358 Uniform price auctions have been shown to be susceptible to underpricing, even in the absence of private information. Without imposing any restriction on admissible demand functions, this paper shows that there is a unique class of supply uncertainty robust demand functions. These are also equilibria if bidders have private information on supply. Furthermore, it is shown that underpricing can be eliminated by allowing bidders only to submit a finite number of bids or by altering the rationing rule. This works whether or not there is supply uncertainty. These results suggest that non-informational underpricing equilibria in uniform price auctions need not be important in practice. This is broadly consistent with the empirical evidence on the performance of uniform versus discriminatory price auctions.

Now revised as IFA 358

Institute of Finance and Accounting

FIN 260

IFA Working Paper

No