Auctioning the Underwriting Spread: Implications for Information Production and Insurance 1

Government securities are auctioned in India, using a novel two-stage auction procedure. In the first stage, a discriminatory auction is used to arrive at an underwriting schedule consisting of aggregate quantity back-stopped by each of the primary dealers and the associated underwriting commissions that the Government agrees to pay the bidders, irrespective of the amount of devolvement in the second stage of the auction. Then, in the second stage, Government securities are auctioned using either uniform price or discriminatory auctions. Primary dealers enter the second stage of the auction procedure having committed to absorb any devolvement in the second stage and enter as residual claimants of unmet supply in the second stage. Using data collected from the RBI on Government securities auctions over the period 2006-2012, we provide empirical evidence, which shows that the information produced in the first stage is powerful in explaining devolvements, extent of bid shading, and bid to cover ratios in the second stage. We also provide a measure of the amount of money left on the table by the Government under this mechanism.