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A Reverse Auction for Toxic Assets

Armantier, Olivier and Holt, Charles A. and Plott, Charles R. (2010) A Reverse Auction for Toxic Assets. Social Science Working Paper, 1330. California Institute of Technology , Pasadena, CA.

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The proposed 2008 TARP auction was intended to facilitate rapid purchases by the U.S. department of Treasury of a wide array of mortgage-backed securities in order to remove these “toxic assets” from the portfolios of financially stressed banks. The Treasury had selected a Reference Price design whereby bids to sell different securities would be normalized or “scored” by reference prices that reflect estimates of relative values. Although the auction was suspended just prior to the 2008 Presidential election, we continued with a series of laboratory experiments aimed at evaluating the performance of Reference Price auctions relative to several benchmark conditions. The experimental results indicate that a simple Reference Price auction can be an effective mechanism for avoiding serious effects of adverse selection and strategic bid manipulation, even when reference prices are not set accurately. An econometric analysis of bidding patterns and auction outcomes reveals how underlying behavior produces efficiency differences in this common-value framework.

Item Type:Report or Paper (Working Paper)
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Group:Social Science Working Papers
Subject Keywords:reverse auction, auction design, common value auction, mortgage backed securities, laboratory experiments
Series Name:Social Science Working Paper
Issue or Number:1330
Record Number:CaltechAUTHORS:20100928-152231463
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:20207
Deposited By: Victoria Mason
Deposited On:29 Sep 2010 18:39
Last Modified:03 Oct 2019 02:07

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