Abstract

http://ssrn.com/abstract=1770065
 
 

Citations (13)



 


 



Cream Skimming in Financial Markets


Patrick Bolton


Columbia Business School - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Tano Santos


Columbia Business School; National Bureau of Economic Research (NBER)

Jose A. Scheinkman


Columbia University; Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

June 20, 2014


Abstract:     
We propose a model where investors can choose to acquire costly information that allows them to identify good assets and purchase them in opaque over the counter (OTC) markets. Uninformed investors trade on an organized exchange and only have access to an asset pool that has been (partially) cream-skimmed by informed dealers. We show that when the quality composition of assets for sale is fixed there is always too much information acquisition and cream skimming by dealers in equilibrium. In the presence of moral hazard in origination, we show that the social value of information acquisition and trading by dealers varies inversely with private incentives to acquire information: just when it is socially optimal to limit costly investment in information by dealers, investors' private incentives to acquire information are at their highest, and vice-versa. Thus, equilibrium entry by informed dealers in OTC markets is generically inefficient.

Number of Pages in PDF File: 49

JEL Classification: G10, G14

working papers series


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Date posted: February 28, 2011 ; Last revised: June 25, 2014

Suggested Citation

Bolton, Patrick and Santos, Tano and Scheinkman, Jose A., Cream Skimming in Financial Markets (June 20, 2014). Available at SSRN: http://ssrn.com/abstract=1770065 or http://dx.doi.org/10.2139/ssrn.1770065

Contact Information

Patrick Bolton
Columbia Business School - Department of Economics ( email )
3022 Broadway
New York, NY 10027
United States
HOME PAGE: http://www0.gsb.columbia.edu/faculty/pbolton/

Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
Tano Santos
Columbia Business School ( email )
3022 Broadway
New York, NY 10027
United States
212-854-0489 (Phone)
212-316-9180 (Fax)

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Jose A. Scheinkman (Contact Author)
Columbia University ( email )
420 W. 118th Street
New York, NY 10027
United States
HOME PAGE: http://www.princeton.edu/~joses
Princeton University - Department of Economics ( email )
26 Prospect Avenue
Princeton, NJ 08544
United States
609-258-4020 (Phone)
609-258-6419 (Fax)
HOME PAGE: http://www.princeton.edu/~joses

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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