ABSTRACT
By reviewing the academic literature on auctions, this chapter discusses current Treasury practice and a popular proposal for reform in critical perspective. It examines the alternative scheme embraced in the Joint Report that uses technology to give better protection against certain kinds of manipulative behavior and that has a potential for lowering borrowing costs. There is a large academic literature on auctions, with important early contributions by William Vickrey and Milton Friedman and significant later work by Paul Milgrom, among others. This research has classified the types of auctions, rigorously modeled the bidding strategies, and ranked auctions by various criteria regarding efficiency. The potential for profit in a corner, or squeeze, lies in the interaction of the three main trading forums for Treasury securities: the when-issued market, the Treasury auction, and the secondary market. The consequences for revenue depend on whether or not the loss from the inability to price discriminate is greater than the gain from added demand.
