# Divisible good auctions: the role of allocation rules

Kremer, Ilan; Nyborg, Kjell G (2004). Divisible good auctions: the role of allocation rules. Rand Journal of Economics, 35(1):147-159.

## Abstract

We examine the role of allocation rules in determining the set of equilibrium prices in uniform- price auctions. Beginning with Wilson (1979), the theoretical literature has argued that these auctions are subject to possible low equilibrium prices. We show that this is due to the way the asset is being divided. We focus on allocation rules that specify the way the asset is divided in cases of excess demand. This may have a dramatic effect on the set of equilibrium prices. In particular, we show that a simple allocation rule (pro rata) eliminates underpricing, while the allocation rule used in practice has a negative effect on equilibrium prices.

We examine the role of allocation rules in determining the set of equilibrium prices in uniform- price auctions. Beginning with Wilson (1979), the theoretical literature has argued that these auctions are subject to possible low equilibrium prices. We show that this is due to the way the asset is being divided. We focus on allocation rules that specify the way the asset is divided in cases of excess demand. This may have a dramatic effect on the set of equilibrium prices. In particular, we show that a simple allocation rule (pro rata) eliminates underpricing, while the allocation rule used in practice has a negative effect on equilibrium prices.

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## Additional indexing

Item Type: Journal Article, refereed, original work 03 Faculty of Economics > Department of Banking and Finance 330 Economics English 1 April 2004 21 May 2015 10:34 05 Apr 2016 19:14 The RAND Corporation, in conjunction with Blackwell Publishing. 0741-6261 https://doi.org/10.2307/1593734 http://www.jstor.org/stable/1593734?seq=1#page_scan_tab_contents https://editorialexpress.com/cgi-bin/rje_online.cgi?action=view&year=2004&issue=spr&page=147&&tid=121259&sc=8NIA4zbE merlin-id:11966
Permanent URL: https://doi.org/10.5167/uzh-110682

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