Neutral Bargaining in Financial Over-The-Counter Markets

Abstract

I study bargaining over prices between two investors in financial over-the-counter markets with asymmetric information. I focus on environments in which an asset owner has private information about both her liquidity state and asset quality, and so a buyer is uncertain about the owner's true motive for selling--whether it is because of a liquidity need or because of a low asset valuation. I apply the concept of neutral bargaining solution to characterize the prices at which the investors trade with each other. I illustrate the implications for asset prices in over-the-counter markets where private information may be prevalent.

A Bayesian approach to investment in innovation projects with the presence of fake innovators

“…This is how this model differs from the common approach to evaluating innovation projects when it is assumed that uncertainty about the quality of the project is completely aleatoric (Nie et al, 2018). It should be noted that a similar approach, taking into account the possibility of deceptive behavior and distinguish it from pure uncertainty, is present in some recent works about bargaining (Kim, 2019). Unlike game models of the market with information asymmetry (Akerlof, 1970;Netzer and Scheuer, 2012;Pecorino and Van Boening, 2018;Lester et al, 2019), we assume multi-period bargaining game with the Bayesian adjustment of subjective assessments.…”

Neutral public good mechanisms

“…While the set of interim incentive efficient mechanisms may be large, the neutral mechanism is essentially unique if Axiom 1 is satisfied. There is no general uniqueness theorem, but the neutral mechanism is shown to be unique for many classes of symmetric problems given in [ 2 , 12 , 13 , 34 , 35 ].…”

“…The key difference is that my analysis makes use of the concept of neutral mechanism, developed by Myerson [ 2 ], which is a refinement of interim incentive efficiency. Given that the literature on the neutral mechanism is slim and that there are only few applications using the concept (for example, see Balkenborg [ 9 ], Balkenborg and Makris [ 10 ], De Clippel and Minelli [ 11 ], and Kim [ 12 , 13 ]), I regard its application to a Bayesian public good environment as a major contribution of this paper.…”

“…This paper solidifies the justification for applying such concept to many bargaining situations with incomplete information. The applications may encompass pretrial negotiations, labor and employment disputes, selling or hiring situations, international conflicts, and bargaining in over-the-counter markets (see, e.g., Kim [ 12 , 13 ]).…”

On the solution of games with arbitrary payoffs: An application to an over‐the‐counter financial market

“…If an asset owner has private information about the asset's quality and liquidity condition, they may be incentivised to hide their motives to sell in an attempt to get a more favourable price. Thus, the bargained price may be influenced by such incentives due to the existence of information asymmetries (Kim, 2019). In such negotiations there can be significant bargaining delays that extend from a few minutes, for very liquid securities such as short-term bonds, to months, as in the real estate market (Tsoy, 2016).…”