Adverse Selection, Licensing and the Role of Securitization in Financial Market Evolution, Structure and Pricing
24 Pages Posted: 17 Aug 2001
Date Written: July 2001
This paper models the structure of a financial market that is composed of two types of institutions, banks and securities or secondary markets. The model analyzes the development of the securities market as a way of trading off its lower cost of securitization with adverse selection due to asymmetric information possessed by banks, using a simple adverse selection model in the tradition of Akerlof (1970). Successive modifications, including licensing contracts similar to those of Leland (1979) and Chan and Leland (1982) solve some of the adverse selection problems by "licensing"loan sellers in an effort to provide minimum quality standards.
Keywords: Secondary Market, Banks, Adverse Selection, Licensing
JEL Classification: C1, C2
Suggested Citation: Suggested Citation