Journal of International Money and Finance 20 (2001) 809–838 www.elsevier.com/locate/econbase Efficiency in auctions: theory and practice  John Morgan * Woodrow Wilson School and Department of Economics, Princeton University, Princeton, NJ 08544, USA Abstract In many contexts, efficiency is an important consideration in structuring auctions. In this paper, we survey several sources of inefficiency arising in auctions. We first highlight how demand reducing incentives, both in theory and in practice, affect the efficiency of multi-unit auctions. Next, we study inefficiencies arising from interdependence in bidder valuations. Again, we highlight both theoretical insights as well as how these translate in practice. Finally, we present an impossibility theorem for attaining efficiency in sufficiently rich auction con- texts. An auction form suggested by Klemperer is discussed as a means of ameliorating inef- ficiencies arising in practice.  2001 Elsevier Science Ltd. All rights reserved. JELS classification: D44; D82 Keywords: Auctions; Efficiency 1. Introduction In the context of conducting monetary policy through open market operations, the main objective of the Eurosystem 1 is to maintain price stability. In achieving this policy goal, a key consideration is to choose procedures that favor efficient allocation of resources and free competition. Officially, the objectives of the Eurosystem are described thus:  Updated copies of this paper can be found at www.wws.princeton.edu/~rjmorgan * Tel: +1-609-258-4842; fax: +1-609-258-2809. E-mail address: rjmorgan@princeton.edu (J. Morgan). 1 The term ‘Eurosystem’ is a shorthand for the composition of banks through which the European System of Central Banks performs its main tasks. 0261-5606/01/$ - see front matter  2001 Elsevier Science Ltd. All rights reserved. PII:S0261-5606(01)00024-9