Asymmetric Information in Frictional Markets for Liquidity : Collateralized Credit vs Asset Sale

This paper studies (non-)equivalence of collateralized credit and asset sales in over-the-counter markets subject to commitment and information frictions. Embedded in a search-theoretic general equilibrium model, a signaling game refined by the undefeated equilibrium endogenizes the choice between pooling and separating offers and addresses the payment puzzle. The results show that non-equivalence depends on economic fundamentals, commitment, and information frictions. Despite adverse selection, first-best consumption can occur for collateralized credit, but not for asset sales, with belief-driven endogenous haircuts and over-collateralization characterizing the terms of trade. An extension incorporating co-existing information-sensitive assets and fiat money sheds new light on portfolio management and diversification under private information and ties optimal payment strategies to monetary policy