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Asset bundling and information acquisition of investors with different expertise

Liang Dai

Journal of Economic Theory, 2018, vol. 175, issue C, 447-490

Abstract: This paper investigates how a profit-maximizing asset originator can coordinate the information acquisition of investors with different expertise by means of asset bundling. Bundling is beneficial to the originator when it discourages investors from analyzing idiosyncratic risks and focuses their attention on aggregate risks. But it is optimal to sell aggregate risks separately in order to exploit investors' heterogeneous expertise in learning about them and thus lower the risk premium. This analysis rationalizes the common securitization practice of bundling loans by asset class, which is at odds with existing theories based on diversification. The analysis also offers an alternative perspective on conglomerate formation (a form of asset bundling), and its relation to empirical evidence in that context is discussed.

Keywords: Asset bundling; Endogenous information acquisition; Heterogeneous learning expertise; Securitization; Conglomerate formation (search for similar items in EconPapers)
JEL-codes: D83 D82 G11 G21 G32 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:175:y:2018:i:c:p:447-490

DOI: 10.1016/j.jet.2018.02.003

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