Bargaining over a Non-Standardized Asset
81 Pages Posted: 2 Dec 2015 Last revised: 14 Jun 2019
Date Written: June 13, 2019
Assets range in the degree of standardization from less standardized real estate or municipal bonds to more standardized futures or Treasuries. I study bargaining over a non-standardized asset between sophisticated investors who possess precise private information about its value to parties. The degree of standardization reflects how accurately public information captures all relevant information about the asset value. I show that bargaining delays are generally positive and hump-shaped in values. When the trade is intermediated by a broker-dealer, the trade is efficient and the bid-ask spread is hump-shaped in values. Greater asset standardization normally reduces bargaining delays and bid-ask spreads.
Keywords: bargaining delay, bid-ask spread, affiliated values, lack of common knowledge, standardized assets, negotiation, public information, credit ratings
JEL Classification: G1, D82, C78
Suggested Citation: Suggested Citation