How does the winner in such an auction become the loser due to the ‘winner curse’?
There is a lacuna in the present T-Bill auction system of RBI. The dealers (investors) are subject to
what is called the ‘Winners Curse’. The value of a T-Bill to a dealer is the price it can fetch in the
secondary market. This is an unobserved random value, which is likely to be common to all dealers.
It is quite unlike the works of art which the Sotheby’s would place at an auction. The price of Mona
Lisa, say, to an avid collector of Da Vinci’s paintings, would be more than what a Picasso collector
would value it. In sharp contrast, market participants are likely to agree on the price of a T-Bill in the
secondary market. Now winning an auction in a discriminatory price method may not be profitable.
For, it would mean that the winner has overestimated the T-Bill value.
1. How does the winner in such an auction become the loser due to the ‘winner curse’?
2.How does forfeiting differ from factoring?
1 Answer | Add Yours
In the passage you give us here, the winner of the auction becomes the loser in reality because he or she cannot make money on the bond that they bought.
The quote is saying that buyers at auction buy a bond mainly in order to resell it on the secondary market. The problem with this, it says, is that there is pretty much a set value for any given bond.
At an auction, the "winner" has to bid more than anyone else. This means the winner is offering to pay more than anyone else thought it was a good idea to pay.
Since bonds have a set value on the secondary market, the person who wins the auction may end up spending too much to get the bond and be unable to make much of a profit reselling it.
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