To Pool or Not to Pool? Security Design in OTC Markets
37 Pages Posted: 21 Nov 2016 Last revised: 3 Dec 2019
Date Written: November 27, 2019
We study the decision to pool assets for a privately informed issuer attempting to sell securities to liquidity suppliers endowed with market power, as is often the case in over-the-counter markets. Contrary to what has been shown for competitive markets, issuing debt on a pool of assets becomes suboptimal in our environment when the potential gains from trade are large. In those cases, selling assets separately reduces the inefficient rationing that is typical in environments with market power. Our results can shed light on recently observed time-variation in the prevalence of pooling in financial markets.
Keywords: Pooling, Security Design, Liquidity, Adverse Selection, Imperfect Competition, OTC Markets
JEL Classification: D82, G32, L14
Suggested Citation: Suggested Citation