Divisible good auctions - the role of allocation rules

Kremer, I and Nyborg, K G (2003) Divisible good auctions - the role of allocation rules. Working Paper. London Business School IFA Working Paper.

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. In this paper 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 the allocation rule used in practice has a negative effect on equilibrium prices.