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3212. Rewarding Primary Dealer Performance

Invited abstract in session WA-43: Market Design 2, stream Market Design.

Wednesday, 8:30-10:00
Room: 99 (building: 306)

Authors (first author is the speaker)

1. Aleksandrs Smilgins
Department of Economics
2. Sasa Pekec
Duke University
3. Jens Leth Hougaard
University of Copenhagen
4. Peter Bogetoft
Copenhagen Business School

Abstract

We study the problem of allocating compensation for a collective effort of competing market participants, such as rewarding market-makers tasked to maintain active price quotations and low bid-ask spreads. Several countries regularly issue government bonds, typically via an auction, and the secondary market stability is important for success of future auctions. In order to achieve that, participation in auctions is restricted to selected bidders who are in turn required to be active in the secondary market. Furthermore, some debt management offices provide annual monetary compensation to incentivize the secondary market performance. We develop a framework to design optimal allocation of the annual incentive amount for individual secondary market performance over time and multiple markets. The proposed scheme is compared to the one currently used by the Danish Debt Management Office.

Keywords

Status: accepted

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