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Rationing in IPOs

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  • Christine Parlour
  • Uday Rajan

Abstract

We consider a rationing mechanism for selling a common-value object. Under certain conditions, the seller earns higher revenue from rationing the object, rather than holding a second-price auction. The mechanism is formally equivalent to dividing the object into k units, and allocating (1/k) units to each of the k highest bidders, at the (k+1)th highest price, for some k > 1. We argue that, in the presence of a liquid secondary market, financial assets are reasonably modeled as having common values. Rationing is commonly observed in IPOs, and this result suggests that it may be superior to allocating the shares at a market-clearing price. In equilibrium, underpricing persists in our model, but is less than it would be with a second-price auction.

Suggested Citation

  • Christine Parlour & Uday Rajan, "undated". "Rationing in IPOs," GSIA Working Papers 217, Carnegie Mellon University, Tepper School of Business.
    • Handle: RePEc:cmu:gsiawp:217
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