Optimality of Securitized Debt with Endogenous and Flexible Information Acquisition

This paper studies the optimality of securitized debt when information acquisition is endogenous and exible. A seller designs an asset backed security and a buyer decides whether to buy it to provide liquidity. Rather than treating the seller as an insider endowed with information, we assume no information asymmetry before bargaining. The buyer has an expertise in acquiring information of the fundamental in the manner of rational inattention. She collects the most relevant information determined by the "shape" of the security, which may endogenously generate adverse selection. Hence, the seller deliberately designs the security in order to induce the buyer to acquire information least harmful to the seller's interest. Issuing securitized debt is uniquely optimal in raising liquidity, regardless of the stochastic interdependence of underlying assets and the allocation of bargaining powers. Fixed aggregate risk and homogeneous information cost are the key factors driving the results. JEL: D86, D82, G32