Publications

To Pool or Not to Pool? Security Design in OTC Markets with Vincent Glode and Christian Opp.

Journal of Financial Economics 145(2), August 2022, pp. 508-526

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. Our analysis reveals how buyers' market power may render the pooling of assets suboptimal — both privately and socially — in particular, when the potential gains from trade are large. Pooling assets then reduces the elasticity of trade volume in the relevant part of the payoff distribution, exacerbating inefficient rationing associated with the exercise of buyers' market power. Our analysis sheds light on the determinants of asset-backed securities issuance, including regulatory reforms affecting financial institutions' liquidity.

Working Papers

Utility Tokens as a Commitment to Competition with Itay Goldstein and Deeksha Gupta.

Journal of Finance, forthcoming

Abstract

We show that utility tokens can limit the rent-seeking activities of two-sided platforms with market power while preserving efficiency gains due to network effects. We model platforms where buyers and sellers can meet to exchange services. Tokens serve as the sole medium of exchange on the platform and can be traded in a secondary market. Tokenizing a platform commits a firm to give up monopolistic rents associated with the control of the platform leading to long-run competitive prices. We show how the threat of entrants can incentivize developers to tokenize and discuss cases where regulation is needed to enforce tokenization.

Incentives to Lose: Disclosure of Cover Bids in OTC Markets with Andrey Ordin.

Abstract

We study incentives for post-trade information disclosure in the over-the-counter financial markets. We argue that execution prices alone do not fully capture the value of the traded assets, and model incentives to hide or reveal information embedded in unexecuted offers. Our model explains why investors, requesting quotes from multiple dealers in the corporate bond market, might choose to conceal the runner-up offer — the cover — from the winning dealer even though the increased informational opacity can decrease dealers’ incentives to win the trade and worsens their quotes. Investors conceal covers if they trade frequently, gains from trade are high, or uncertainty about bond values is low. We discuss the implications for market liquidity, fragmentation, and the design of electronic RFQ platforms.

Selling to Investor Network: Allocations in the Primary Corporate Bond Market.

Abstract

I develop a model of the primary market for corporate bonds, in which an issuer optimally chooses an issuance price and allocations to investors based on their trading connections in the secondary over-the-counter market. Expected secondary market liquidity, which depends on the structure of the trading network in this market, deter- mines investors’ demands in the primary market and, in turn, the issuer’s revenues. I show that trading by less connected investors has a relatively high negative impact on expected secondary market liquidity and disproportionately reduces the demands of all investors in the primary market. As a result, the issuer can increase her profits by restricting allocations of new bonds only to more connected investors. This explains the commonly observed exclusion of small institutional investors from the primary market, which is often coupled with seemingly underpriced bonds.

Inactive Working Papers

Bidder Disclosure in Informal Security Auctions.

Abstract

This paper studies verifiable disclosure by bidders in a security auction, in which a seller does not commit to any particular auction rule and chooses the winner based on submitted bids. Unlike in the standard cash auctions where a bid is fully informative about the payment to the seller, in an equity auction, the information about the payment is only determined in the equilibrium and disclosure along with a bid can change the seller's inference. I show that bidders prefer to disclose their private values, which lowers the seller’s revenue and makes the commitment to shut down communication valuable. Instances where the seller still prefers to know about bidders' values can be explained in an extended model with learning.