Bargaining in Securities
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.
Isaias N. Chaves, Felipe Varas
Chaves, Isaias N., and Felipe Varas. 2022. Bargaining in Securities.LINK