Security design without verifiable retention

Qi Li

Journal of Economic Theory, 2022, vol. 200, issue C

Abstract: This paper studies security design with adverse selection when verifiable retention is impossible due to market segmentation and price opacity across market segments. Rather than signaling through retention, sellers in the model signal quality through posted prices, which is feasible because the posted price affects buyers' search behavior and the equilibrium probability of selling. The optimal security design, in this case, is to break up the cash flow of an asset into several debt securities of increasing seniority. The size of senior relative to subordinated debts is affected by the equilibrium markup. Search frictions, as determinants of the markup, shape the endogenous creation of financial securities.

Keywords: Competitive search; Adverse selection; Market segmentation; Transparency; Residential mortgage-backed security; Collateralized debt obligation (search for similar items in EconPapers)
JEL-codes: D82 G12 G32 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0022053121001988
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:200:y:2022:i:c:s0022053121001988

DOI: 10.1016/j.jet.2021.105381

Access Statistics for this article

Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell

More articles in Journal of Economic Theory from Elsevier
Bibliographic data for series maintained by Catherine Liu ().