Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/253485 
Year of Publication: 
2020
Citation: 
[Journal:] Theoretical Economics [ISSN:] 1555-7561 [Volume:] 15 [Issue:] 2 [Publisher:] The Econometric Society [Place:] New Haven, CT [Year:] 2020 [Pages:] 545-582
Publisher: 
The Econometric Society, New Haven, CT
Abstract: 
We study banks' incentive to pool assets of heterogeneous quality when investors evaluate pools by extrapolating from limited sampling. Pooling assets of heterogeneous quality induces dispersion in investors' valuations without affecting their average. Prices are determined by market clearing assuming that investors cannot borrow nor short-sell. A monopolistic bank has the incentive to create heterogeneous bundles only when investors have enough money. When the number of banks is sufficiently large, oligopolistic banks choose extremely heterogeneous bundles, even when investors have little money and even if this turns out to be collectively detrimental to the banks. If in addition banks can originate low quality assets, even at a cost, this collective inefficiency is exacerbated and pure welfare losses arise. Robustness to the presence of rational investors and to the possibility of short-selling is discussed.
Subjects: 
Complex financial products
bounded rationality
disagreement
market efficiency
sampling
JEL: 
C72
D53
G14
G21
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc Logo
Document Type: 
Article

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