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Securitization and Aggregate Investment Efficiency

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Abstract

This paper studies the efficiency of competitive equilibria in economies where the expansion of investment is facilitated by securitization. We show that the use of securitization is generally associated with constrained inefficient aggregate investment, thereby justifying regulatory intervention in markets for securitized assets. We examine the effectiveness of three policy instruments to address this inefficiency: ex-ante capital / leverage requirements, skin-in-the game (retention) requirements and initiatives to improve transparency in the securitization process. We find that leverage/capital restrictions and improved transparency can increase welfare in our environment, but that forcing originators to hold additional skin-in-the game can never increase welfare.

Suggested Citation

  • Afrasiab Mirza & Eric Stephens, 2016. "Securitization and Aggregate Investment Efficiency," Carleton Economic Papers 16-05, Carleton University, Department of Economics, revised 24 Jan 2017.
    • Handle: RePEc:car:carecp:16-05
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    More about this item

    Keywords

    Securitization; pecuniary externalities; nancial frictions; macroprudential regulation; re-sales; incomplete markets; retention requirements; skin in the game;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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