Privately Optimal Securitization and Publicly Suboptimal Risk Sharing

Privately informed owners securitizing assets signal positive information by retaining su ¢ cient interest. Signaling provides social bene\u85ts, allowing uninformed investors to insure without fear-ing adverse selection. Instead of signaling, owners of high value assets may prefer a pooling equilibrium in which they securitize more of the asset, relying on speculators to gather infor-mation and bring prices closer to fundamentals. This induces suboptimal risk sharing, since uninformed investors face adverse selection. We analyze privately optimal securitization and the choice between signaling and reliance on speculative markets. In the model, prices are set competitively, with an endogenously informed speculator trading against uninformed hedgers placing rational orders. If a structuring exists providing su ¢ cient speculator gains, her e¤ort is high, mispricing is low, and all/most of the asset is securitized in a pooling equilibrium. Here risky debt and levered equity are optimal, with optimal face value trading o ¤ higher unit pro\u85ts for the speculator against lower hedging demand. Hedgers imperfectly insure, buying only the concave claim, the only source of speculator pro\u85ts. If risk-aversion is low and/or endowment shocks are small, hedging demand is low, leading to low speculator e¤ort. Here high types sel