To Pool or Not to Pool? Security Design in OTC Markets
36 Pages Posted: 21 Nov 2016 Last revised: 6 Jan 2022
Date Written: September 23, 2021
We study security issuers' decisions on whether to pool assets when facing counterparties endowed with market power, as is common in over-the-counter markets. Our analysis reveals how buyers' market power may render the pooling of assets suboptimal --- both privately and socially --- in particular, when the potential gains from trade are large. Pooling assets then reduces the elasticity of trade volume in the relevant part of the payoff distribution, exacerbating the inefficient rationing associated with the exercise of buyers' market power. Our analysis provides insight on the determinants of asset-backed securities issuance, including regulatory reforms affecting financial institutions' liquidity.
Keywords: Pooling; Adverse selection; Imperfect competition; Decentralized markets
JEL Classification: D82, G32, L14
Suggested Citation: Suggested Citation