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Asset bundling and information acquisition of investors with different expertise

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  • Dai, Liang

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.

Suggested Citation

  • Dai, Liang, 2018. "Asset bundling and information acquisition of investors with different expertise," Journal of Economic Theory, Elsevier, vol. 175(C), pages 447-490.
    • Handle: RePEc:eee:jetheo:v:175:y:2018:i:c:p:447-490
    DOI: 10.1016/j.jet.2018.02.003
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    Cited by:

    1. Cai, Zhifeng & Dong, Feng, 2023. "Public disclosure and private information acquisition: A global game approach," Journal of Economic Theory, Elsevier, vol. 210(C).

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    More about this item

    Keywords

    Asset bundling; Endogenous information acquisition; Heterogeneous learning expertise; Securitization; Conglomerate formation;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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