Paper #1712

Title:

Security design in non-exclusive markets with asymmetric information

Authors:

Vladimir Asriyan and Victoria Vanasco

Date:

November 2019 (Revised: June 2021)

Abstract:

We study the problem of a seller (e.g. a bank) who is privately informed about the quality of her asset and needs to raise funds from uninformed buyers (e.g. investors) by issuing securities backed by her asset cash ows. In our setting, buyers post menus of contracts to screen the seller, but the seller cannot commit to trade with only one buyer, i.e., markets are non-exclusive. Non-exclusive markets behave very dierently from exclusive ones: (i) separating contracts are never part of equilibrium; (ii) mispricing of claims is always larger than in exclusive markets; (iii) there is always a semi-pooling equilibrium where all sellers issue the same debt contract priced at average-valuation, and sellers of low-quality assets issue remaining cash ows at low-valuation; (iv) market liquidity can be higher or lower than in exclusive markets, but (v) the average quality of originated assets is always lower. Our model's predictions are consistent with empirical evidence on issuance and pricing of mortgage-backed securities, and we use the theory to evaluate recent reforms aimed at enhancing transparency and exclusivity in markets.

Keywords:

adverse slection, security design, non-exclusivity, tranching, liquidity, securitization, transparency, opacity, complexity, market design, regulation

JEL codes:

G14, G18, D47, D82, D86

Area of Research:

Macroeconomics and International Economics

Published in:

Review of Economic Studies (2024) 91, 690–719

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