Underwriting Government Debt Auctions

We examine a novel two-stage mechanism for selling government securities, wherein the dealers underwrite in the first stage the sale of securities, which are auctioned in stage 2, via either a Discriminatory Auction (DA) or a Uniform Price Auction (UPA). Using proprietary data on auctions during 2006-2012, we find under DAs (a) The underwriting commissions are higher and exhibit more volatility, (b) Stage 1 award concentrations are higher, and (c) Stage 2 bid-shading and the degree of underpricing are higher. Stage 1 outcomes are powerful in explaining Stage 2 auction outcomes including the likelihood of devolvement, and bid shading.