Why government bonds are sold by auction and corporate bonds by posted-price selling

When information is costly, a seller may wish to prevent prospective buyers from acquiring information, for the cost of information acquisition ultimately is borne by the seller. A seller can achieve the desired prevention through posted-price selling, by offering prospective buyers a discount. No such prevention is possible in the case of an auction. We establish the result that the seller prefers posted-price selling when the cost of information acquisition is high and auctions when it is low. We view corporate bonds as an instance of the former case, and government bonds as an instance of the latter. (c) 2007 Elsevier Inc. All rights reserved.