Asset Bundling and Information Acquisition of Investors with Different Expertise

64 Pages Posted: 13 Oct 2017 Last revised: 16 Mar 2020

See all articles by Liang Dai

Liang Dai

The Chinese University of Hong Kong, Shenzhen (CUHK-Shenzhen)

Date Written: February 4, 2018

Abstract

This paper investigates how a profit-maximizing asset originator can coordinate the information acquisition of investors with different expertise by means of asset bundling. Bundling is beneficial to the originator when it discourages investors from analyzing idiosyncratic risks and focuses their attention on aggregate risks. But it is optimal to sell aggregate risks separately in order to exploit investors' heterogeneous expertise in learning about them and thus lower the risk premium. This analysis rationalizes the common securitization practice of bundling loans by asset class, which is at odds with existing theories based on diversification. The analysis also offers an alternative perspective on conglomerate formation (a form of asset bundling), and its relation to empirical evidence in that context is discussed.

Keywords: asset bundling, endogenous information acquisition, heterogeneous learning expertise, securitization, conglomerate formation

JEL Classification: D83, G11, G21

Suggested Citation

Dai, Liang, Asset Bundling and Information Acquisition of Investors with Different Expertise (February 4, 2018). Journal of Economic Theory, Vol. 175, 447-490, 2018, Available at SSRN: https://ssrn.com/abstract=3051819 or http://dx.doi.org/10.2139/ssrn.3051819

Liang Dai (Contact Author)

The Chinese University of Hong Kong, Shenzhen (CUHK-Shenzhen)

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