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Working Paper
Bargaining in Securities
Author(s)
A privately informed buyer and a seller negotiate over the terms of a joint
project. The buyer has private information that affects both his standalone value
and the net returns from the project. The seller makes offers in a one-dimensional
family of securities (debt’s face value, share of equity, etc), so that the value of an
accepted offer depends on the buyer’s private information. We characterize Markovian bargaining dynamics in continuous time. We show that equilibria either have
instant trade, or delay of a particular form: trade begins smoothly in a gradual
concessions phase; reaches an impasse of random length during which no offers are
accepted; and then ends suddenly with an atom of types trading in an instant.
Whenever there is delay, steeper security families (those that are more informationally sensitive) lead buyer types above a cutoff to pay strictly less, and types
below to pay weakly more. We provide conditions under which the buyer prefers
bargaining in a flatter family of securities, and we show that he may prefer flatter
securities even though these may cause higher expected delay in equilibrium.
Date Published:
2022
Citations:
Chaves, Isaias N., Felipe Varas. 2022. Bargaining in Securities.