Working Paper: NBER ID: w27361
Authors: Vincent Glode; Christian C. Opp; Ruslan Sverchkov
Abstract: We study security issuers' decision whether to pool assets when facing counterparties endowed with market power, as is common in over-the-counter markets. Unlike in competitive markets, pooling assets may be suboptimal in the presence of market power - both privately and socially - in particular, when the potential gains from trade are large. In these cases, pooling assets reduces the elasticity of trade volume in the relevant part of the payoff distribution, exacerbating inefficient rationing associated with the exercise of market power. Our results shed light on recently observed time-variation in the prevalence of pooling in financial markets.
Keywords: Security Design; OTC Markets; Market Power; Pooling Assets
JEL Codes: D82; G32; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Market Power (L11) | Issuer's Decision to Pool Assets (G11) |
| Market Power (L11) | Elasticity of Trade Volume (F14) |
| Pooling Assets (G19) | Inefficient Rationing (D45) |
| Market Power (L11) | Preference for Separate Sales (D49) |
| Scarcity of Liquidity (E51) | Preference for Separate Sales (D49) |