Asymmetric information in frictional markets for liquidity: collateralized credit vs asset sale

Florian Madison

No 220, ECON - Working Papers from Department of Economics - University of Zurich

Abstract: This paper studies (non-)equivalence of collateralized credit and asset sale for information-sensitive assets in over-the-counter markets. A signaling game refined by the undefeated equilibrium endogenizes the choice between pooling and separating offers and addresses the payment puzzle. The results show that non-equivalence depends on lenders' commitment power. Despite information frictions, first-best consumption can occur for collateralized credit, but not for asset sales, with endogenous haircuts and over-collateralization characterizing the terms of trade. The general equilibrium determines asset prices and provides policy recommendations including open market operations.

Keywords: Assets; liquidity; asymmetric information; collateral; undefeated equilibrium (search for similar items in EconPapers)
JEL-codes: D82 E44 G12 G21 (search for similar items in EconPapers)
Date: 2016-03, Revised 2020-11
New Economics Papers: this item is included in nep-ban and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Journal Article: Asymmetric information in frictional markets for liquidity: Collateralized credit vs asset sale (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:zur:econwp:220

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