Caracas Chronicles

Setting aside the insane, Kafka-on-Burundanga administrative side of the new SICAD system, there’s a second set of questions that are more macroeconomic in nature – i.e., what’s the price of SICAD dollars likely to be, and what’s that likely to do to inflation? And what the what is a “Modified Vickrey Auction”, anyway?

Well, we know what a Vickrey Auction is. It’s a sealed-bid auction where the top bidder wins, but pays the second-place bidder’s offer price. Vickrey Auctions are the darling of economic theorists, and have spawned a whole academic literature, because they have some special characteristics. In 1961, William Vickrey demonstrated that, uniquely, his pricing rule “makes it a dominant strategy for bidders to report their values truthfully, even when they know that their reported values will be used to allocate goods efficiently.”

What Vickrey Auctions are very good at, in other words, is eliciting accurate information from bidders about just how much the auction good is worth to them. A Vickrey Auction is precisely the mechanism you’d want to institute if your goal was to establish an accurate reference price for the dollar without out-and-out floating it. For an economist, that is a very good thing.

For Finance Minister Giordani, on the other hand, it’s dreadful. A straight out Vickrey would probably see SICAD dollars priced at several multiples of the CADIVI rate. Bs.15? Bs.25? Who can tell? What’s clear is that it would amount to a hardcore devaluation.

What we can tell is that the inflationary impact of a sudden jump in the alternative rate – not to mention the humiliation-quotient for Giordani of letting everyone see the CADIVI emperor parade around stark naked – would be unacceptable.

The government has no interest in creating a mechanism where a real reference price for the dollar can be established. Which, of course, is where the “Modified” bit comes in.

Officially, the auction will be modified only in that it will take the average of all winning bids as the price for all dollar buyers, rather than the second-highest bid. In fact, it’ll go much further than that.

The first element of “modification” is to note is that the auctions are off-limits not just to private individuals but also to any firm that wasn’t registered with CADIVI/SITME beforehand. (There’s a separate angry-rant to be made here about how this bias in favor of incumbent firms limits market contestibility, generates arbitrary rents for businesses simply based on when they started, hampers entrepreneurship and deepens precisely the oligopolic features chavismo claims to fight but, whatever, one rant at a time…)

Already that first modification badly undermines the system’s efficiency as a way of generating a reliable reference price for the dollar – we’re no longer going to find out about the relative scarcity of U.S. dollars to Venezuelan bolivars in the economy as a whole but rather in an arbitrary subset of it.

Much worse, though, is this little slip of the tongue from Giordani in yesterday’s press conference. When pressed on what prices the system would yield for dollars, he said, “Tiene que ser una cosa democrática, abierta, con tope” – (“it has to be a democratic thing, open, with a ceiling“).

This is an ambiguous formulation – he could be referring either to a price ceiling or a volume ceiling. His analogy with the allocation system used for bonds makes it seem as though it’s a volume ceiling (Hattip: GG2013), yet politically the notion that they’ll allow bids to rise as high as needed within a tight volume ceiling seems demential – my guess is that, whether that’s the initial intention or not, the system will gravitate towards a price ceiling.

A price ceiling – whether announced or implicit – would do to a Vickrey Auction by way of modification very much what Cecilia Jimenez did to that Ecce Homo fresco by way of restoration: it mangles it beyond any recognition.

The whole point of Vickrey is to elicit “truthful” bids for the good being auctioned – set out an administrative top and you’ve entirely undone it. It’s unclear, in fact, in what sense it’s an “auction” at all any more, except as one commenter suggested, that whomever pays the meatiest bribe gets the dollars. (I’m still consulting on this point – suddenly theorists with expertise in auction design are the hottest commodities out there!)

One possibility is that they announced this before Giordani and Merentes had actually reached an agreement. Merentes, the Central Bank chief, did explicitly say that dollars would go to the highest bidder, which is plainly inconsistent with Giordani’s “con tope” approach. (It’s also inconsistent with Vickrey’s second-bidder price system, pero bueh…)

I suspect that, when it’s all said and done, there’s just one aspect of Vickrey that these jokers intend to keep: the sealed bids. Since bids will be sealed, Giordani will be able to award dollars at any price he wants and call that the auction-winning average bid price, without anyone being able to check.

The alternative – honoring the real average winning-bid – would leave Giordani in an impossible bind. Because both CADIVI and SICAD will be drawing from the same pool of Petrodollars, there’s a zero-sum dynamic between them. A dollar sold through SICAD is one that can’t be allocated via CADIVI, and vice-versa. Supply too few dollars to SICAD, and the average bid will spike to politically unacceptable levels. Reroute dollars away from CADIVI to bring down the average SICAD bid and suddenly you’re scrimping on the essential imports of food, medicine and procurement goods that CADIVI specializes in. It’s a Catch-22.

Conociendo al personaje, it’s unthinkable to me that Giordani will allow such a dynamic to develop. What we’re heading to here is a kind of “dirty auction” – with both CADIVI and SICAD exchange rates determined administratively, and with excess demand bleeding off to the illegal black market.

That high-pitched whirring sound you hear, by the way, is William Vickrey spinning in his grave.