Are there too many safe securities? Securitization and the incentives for information production

We present a model that helps explain several past collapses of securitization markets. Originators issue too many informationally insensitive securities in good times, blunting investor incentives to become informed. The resulting scarcity of informed investors exacerbates market collapses in bad times. Ine ¢ ciency arises because informed investors are a public good from the perspective of originators. All originators bene\u85t from the presence of additional informed investors in bad times, but each originator minimizes his reliance on costly informed capital in good times by issuing safe securities. Our model suggests regulations that limit the issuance of safe securities in good times. We are grateful to David Scharfstein and Jeremy Stein for their guidance throughout this project. W