Vincent Glode

Over-the-Counter vs. Limit-Order Markets: The Role of Traders' Expertise

Decentralized markets attract large amounts of trade volume, even though they exhibit frictions absent in centralized exchanges. We develop a model with asymmetric information and expertise acquisition where some traders try to exploit any market structure to inefficiently screen their counterparties. In this environment, frictions characteristic of decentralized markets, such as time-consuming search, can promote higher efficiency. First, screening behavior may be less aggressive when traders reach fewer counterparties. Second, for asset classes where information improves allocative efficiency, decentralized markets with predictable trading encounters may dominate by encouraging expertise acquisition. In contrast, when information causes adverse selection, centralized markets dominate.We propose a parsimonious model to evaluate the relative merits of centralized and decentralized trade when agents are asymmetrically informed about the value of an asset. In a centralized market, the seller posts one price and buyers simultaneously decide whether to pay this price for the asset. In a decentralized market, the seller sequentially contacts buyers and quotes them potentially different prices. We compare the social efficiency of trade in these two types of market when traders’ information sets are independent of the market structure as well as when the acquisition of information by traders is endogenous.

To Pool or not to Pool? Security Design in OTC Markets

This paper studies the optimality of pooling and tranching for a privately informed originator who offers securities in an over-the-counter (OTC) market in which buyers have market power. Such a market scenario is particularly relevant when many of the natural counterparties face binding regulatory constraints. Contrary to the standard result that pooling and tranching are optimal practices, we find that selling assets separately may be optimal for originators, as doing so weakens buyers’ incentives to inefficiently screen them. Our results shed light on recently observed time-variation in the prevalence of pooling and tranching in financial markets. ∗The authors thank Barney Hartman-Glaser, Rich Kihlstrom, Marius Zoican, Pavel Zryumov, and audiences at BI-Oslo, EIEF, Illinois, INSEAD, UT-Dallas, Wharton, the NFA Meetings, and the SFS Cavalcade for helpful comments that significantly improved the paper. All authors are from the Wharton School at the University of Pennsylvania and can be reached at vglode@wharton.upenn.edu, opp@wharton.upenn.edu, and ruslans@wharton.upenn.edu, respectively.

Bargaining with Asymmetric Costs for Information

We generalize and correct a model of bargaining with endogenous information acquisition proposed by Dang (2008). Allowing for asymmetric information costs, we show that the opportunity to obtain information during the bargaining process can lead to inefficient outcomes when the responders cost of obtaining this information is low. We then show that, for very low costs, this inefficiency is robust to allowing agents to voluntarily increase their own information costs and potentially eliminate adverse selection problems.