Neutral Bargaining in Financial Over-The-Counter Markets

Abstract

I study bargaining over prices between two investors in financial over-the-counter markets with asymmetric information. I focus on environments in which an asset owner has private information about both her liquidity state and asset quality, and so a buyer is uncertain about the owner's true motive for selling—whether it is because of a liquidity need or because of a low asset valuation. I apply the concept of neutral bargaining solution to characterize the prices at which the investors trade with each other. I illustrate the implications for asset prices in over-the-counter markets where private information may be prevalent.

Keywords: bargaining, asymmetric information, mechanism design, interim efficiency, neutral bargaining solution, asset pricing, over-the-counter markets

JEL Classification: C78, D82, G12, G14