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4/8/20141•Today:–Brief discussion of auction design.–Market based emissions regulation: Design andimplementation.•Readings for today: Goulder papers (required);Phaneuf chapter (optional). See syllabus forcomplete reference.•Thursday: Stakeholder meeting!!•Round 2 bids due tonight: Uniform priceauction!!Round 1 : Pay‐as‐bid auction
4/8/20142HOUR 1WednesdayFridayDemand : 11,013 MWMarginal Price : $41.50Demand : 11,013 MWMarginal Price : $39.47020406080PRICE105000100001500020000cummw020406080100PRICE105000100001500020000cummwWhy are some firms bidding in at $0 when this is a pay‐as‐bid auction??Is this a good strategy?HOUR 2WednesdayFridayDemand : 15,659 MWMarginal Price : $45Demand : 15,659 MWMarginal Price : $53020406080PRICE205000100001500020000cummw020406080100PRICE205000100001500020000cummw
4/8/20143HOUR 3WednesdayFridayDemand : 20,141 MWMarginal Price : $58Demand : 20,141 MWMarginal Price : $447 (!!)4050607080PRICE305000100001500020000cummw0100200300400500PRICE305000100001500020000cummwWhy is the price so different across Wednesday/Friday?HOUR 4WednesdayFridayDemand : 17,059 MWMarginal Price : $55.94Demand : 17,059 MWMarginal Price : $47020406080PRICE405000100001500020000cummw050100PRICE405000100001500020000cummw
4/8/20144Quiz # 1How (if at all) did your bidding strategy changebetween the uniform price auction (practiceround 0) and the pay as bid auction design(round 1)?Briefly explain the rationale for this change.Two common forms of multi‐unit auctions•Sealed bid uniform price–ESG practice round•Sealed bid discriminatory (pay‐as‐bid)–ESG Round 1
4/8/20145Multi‐unit auctions financegovernment debt•To finance the public debt, the U.S. Treasury sellsbonds, Treasury Inflation‐Protected Securities(TIPS), etc. to institutional and individualinvestors through public auctions.•Treasury auctions occur regularly.•Treasury accepts competitive bids in ascendingorder of their rate, yield, or discount margin(lowest to highest) until the quantity of awardedbids reaches the offering amount.Multi‐unit auctions – Treasury bills•In both uniform and discriminatory auctions,bidders submit bid curves which specify howmany bonds they would purchase at a givenprice.•Bonds are allocated to highest bids.•Result: bonds are allocated to those who valuethem most.
4/8/20146Multi‐unit auction design•Prior to 1993, auctions of government bonds (treasurybills) were all of the discriminatory (pay‐as‐bid) type.•Government accepts competitive bids in ascendingorder of their rate (lowest to highest) until the quantityof awarded bids reaches the offering amount.•Nobel prize winners, Merton Milller and MiltonFriedman, led a campaign to change the auction designfrom discriminatory to a uniform‐price auction.Leading economists advocate a changeto a uniform price auction in order toreduce the government’s cost ofborrowing.