 Asymmetric information in frictional markets for liquidity: Collateralized credit vs asset saleJournal of Economic Dynamics and Control, 2024, vol. 159, issue C Abstract: This paper studies (non-)equivalence of collateralized credit and asset sales in over-the-counter markets subject to commitment and information frictions. Embedded in a search-theoretic general equilibrium model, a signaling game refined by the undefeated equilibrium endogenizes the choice between pooling and separating offers and provides novel insights under what conditions either payment strategy dominates the other. The results show that non-equivalence depends on economic fundamentals, commitment, and information frictions. Despite adverse selection, first-best consumption can occur for collateralized credit, but not for asset sales, with belief-driven endogenous haircuts and over-collateralization characterizing the terms of trade. An extension incorporating co-existing information-sensitive assets and fiat money sheds new light on portfolio management and diversification under private information and ties optimal payment strategies to monetary policy. Keywords: Assets; Liquidity; Asymmetric information; Collateral; Undefeated equilibrium (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:159:y:2024:i:c:s0165188923002142 DOI: 10.1016/j.jedc.2023.104808 Access Statistics for this article Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok More articles in Journal of Economic Dynamics and Control from Elsevier |
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