Neutral Bargaining in Financial Over-The-Counter Markets
AEA PAPERS AND PROCEEDINGS VOL. 109, MAY 2019 (pp. 539-44)
11 Pages Posted: 19 Dec 2018 Last revised: 15 May 2019
Date Written: May 13, 2019
I study bargaining over prices between two investors in financial over-the-counter markets with asymmetric information. I focus on environments in which an asset owner has private information about both her liquidity state and asset quality, and so a buyer is uncertain about the owner's true motive for selling—whether it is because of a liquidity need or because of a low asset valuation. I apply the concept of neutral bargaining solution to characterize the prices at which the investors trade with each other. I illustrate the implications for asset prices in over-the-counter markets where private information may be prevalent.
Keywords: bargaining, asymmetric information, mechanism design, interim efficiency, neutral bargaining solution, asset pricing, over-the-counter markets
JEL Classification: C78, D82, G12, G14
Suggested Citation: Suggested Citation