Optimal Information and Security Design

66 Pages Posted: 2 May 2022

See all articles by Nicolas Inostroza

Nicolas Inostroza

University of Toronto

Anton Tsoy

University of Toronto - Department of Economics

Date Written: April 25, 2022

Abstract

Abstract An asset owner designs an asset-backed security and a signal about its value. After privately observing the signal, he sells the security to the monopolistic liquidity supplier. Any optimal signal structure guarantees the security sale and commits the issuer not to learn too positive private information about the security value. The optimal security design is pure equity. It is risky debt under additional liquidity requirements akin to Basel III regulation. Thus, the standard intuition behind debt optimality as the least informationally sensitive security holds only under additional restrictions (e.g., regulatory) on security or signal design.

Keywords: security design, asymmetric information, information design

JEL Classification: D82, D86, G32

Suggested Citation

Inostroza, Nicolas and Tsoy, Anton, Optimal Information and Security Design (April 25, 2022). Available at SSRN: https://ssrn.com/abstract=4093333 or http://dx.doi.org/10.2139/ssrn.4093333

Nicolas Inostroza

University of Toronto ( email )

Toronto, Ontario M5S 3G8
Canada

Anton Tsoy (Contact Author)

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S3G7
Canada

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