Asymmetric Information and Sovereign Debt: Theory Meets Mexican Data

Using bid-level data from discriminatory auctions for Mexican government bonds, we demonstrate that asymmetric information about default risk is a key friction in sovereign bond markets. We document large bidders achieve higher bid-acceptance rates than other despite paying no more executed bids. then propose new model of primary markets which investors may differ wealth, aversion, market power, and information. Only can qualitatively account our empirical finding, rare disasters quantitatively match bidding yield moments. Counterfactuals reveal substantial effects on yields.