Optimality of Securitized Debt with Endogenous and Flexible Information Acquisition

Ming Yang
Additional contact information
Ming Yang: Princeton University

No 1328, Working Papers from Princeton University, Department of Economics, Econometric Research Program.

Abstract: An issuer designs a contract and agents flexibly acquire information when deciding whether to accept it and provide liquidity. Unlike the existing literature, we do not impose any physical restriction on information structure to capture the idea of flexible information acquisition. Facing an informational cost measured by reduction of Shannon's entropy, agents collect the most relevant information that is determined by the "shape" of the contract. Thus in order to reduce the effect of adverse selection, the issuer designs the contract to avoid information acquisition, or induce her counterparty to acquire information least harmful to her interest. Without restricting attention to monotone securities, we show that pooling and tranching (i.e., issuing securitized debt) is uniquely optimal in providing liquidity, regardless of the stochastic interdependence of underlying assets and the allocation of bargaining power.

Keywords: security design; endogenous and flexible information acquisition; pooling and tranching (search for similar items in EconPapers)
JEL-codes: D82 D86 G32 (search for similar items in EconPapers)
Date: 2011-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://detc.princeton.edu/wp-content/uploads/2016/11/wp019_2011_Yang.pdf
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://detc.princeton.edu/wp-content/uploads/2016/11/wp019_2011_Yang.pdf [302 Found]--> https://detc.princeton.edu/wp-content/uploads/2016/11/wp019_2011_Yang.pdf [301 Moved Permanently]--> https://economics.princeton.edu/the-william-s-dietrich-ii-economic-theory-center/wp-content/uploads/2016/11/wp019_2011_Yang.pdf)

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:pri:metric:wp019_2011_yang.pdf

Access Statistics for this paper

More papers in Working Papers from Princeton University, Department of Economics, Econometric Research Program. Contact information at EDIRC.
Bibliographic data for series maintained by Bobray Bordelon ().