Auctions: Theory and Possible Applications to Economies in Transition

IMF Working Papers, February 1, 1993

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A major effort is taking place in many parts of the world to establish market-oriented institutions, particularly evident in the transforming economies in Eastern Europe and the republics of the former Soviet Union.
The paper assesses various auction techniques to price and allocate:
- government securities,
- refinance credit,
- foreign exchange,
- state assets in the context of privatization programs.
Before recommendations on auction formats, the paper explains basic auction formats and assesses advantages and disadvantages drawing on the existing, and mostly theoretical, literature.

Assesses various auction techniques for pricing and allocation of financial instruments and state assets in transition economies.
Draws on auctions literature to evaluate:
- auction format,
- auction mechanism,
- auction participant behavior,
- bid auction types (sealed-bid auction, second-price auction),
- uniform-price auction and marginal-price auction characteristics,
- mechanisms concern such as price dampening effect.

The paper explains basic auction formats and assesses advantages and disadvantages of these formats based on the existing literature, which is described as mostly theoretical.
Auction types and concepts explicitly discussed:
- sealed-bid auction,
- second-price auction,
- uniform-price auction,
- marginal-price auction,
- issues of auction mechanism design and auction participant incentives,
- price dampening effect.

Focuses on applications of auction techniques to:
- pricing and allocation of government securities,
- refinancing credit operations,
- foreign exchange allocation,
- sale of state assets under privatization programs.
Recommendations are grounded in the paper’s explanation of auction formats and the assessment of their pros and cons for transition economies.