Cream Skimming in Financial Markets

49 Pages Posted: 28 Feb 2011 Last revised: 25 Jun 2014

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)

Multiple version iconThere are 2 versions of this paper

Date Written: 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.

JEL Classification: G10, G14

Suggested Citation

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

Patrick Bolton

Columbia Business School - Department of Economics ( email )

420 West 118th Street
New York, NY 10027
United States

HOME PAGE: http://www0.gsb.columbia.edu/faculty/pbolton/

Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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European Corporate Governance Institute (ECGI)

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Belgium

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Tano Santos

Columbia Business School ( email )

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Room 815
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United States
212-854-0489 (Phone)
212-316-9180 (Fax)

National Bureau of Economic Research (NBER)

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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 )

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Princeton, NJ 08544
United States
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609-258-6419 (Fax)

HOME PAGE: http://www.princeton.edu/~joses

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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