Dynamic coordination with flexible security design
Subject
Economics, Economics
Publishing details
Social Sciences Research Network
Authors / Editors
Ozdenoren E;Yuan K;Zhang S
Biographies
Publication Year
2018
Abstract
Borrowers obtain funding for production by issuing securities backed by the current-period div- idend and resale price of a long-lived collateral asset. Borrowers are privately informed about the collateral quality. A higher (lower) resale price lowers (increases) adverse selection and makes the as- set a good (lousy) collateral. Conversely, good (lousy) collateral has a high (low) resale price. When only equity is issued, this dynamic feedback between the asset price and collateral quality can lead to multiple equilibria. Optimal flexible security design eliminates multiple equilibria fragility and improves welfare through intertemporal coordination. When the security design is rigid, multiple equilibria reemerge
Keywords
Liquidity; Security design; Financial fragility; Repo
Available on ECCH
No