Optimality of Securitized Debt with Endogenous and Flexible Information Acquisition

An issuer designs a contract and agents flexibly acquire information when deciding whether to accept it and provide liquidity. Unlike the existing literature, we do not impose any physical restriction on information structure to capture the idea of flexible information acquisition. Facing an informational cost measured by reduction of Shannon's entropy, agents collect the most relevant information that is determined by the "shape" of the contract. Thus in order to reduce the effect of adverse selection, the issuer designs the contract to avoid information acquisition, or induce her counterparty to acquire information least harmful to her interest. Without restricting attention to monotone securities, we show that pooling and tranching (i.e., issuing securitized debt) is uniquely optimal in providing liquidity, regardless of the stochastic interdependence of underlying assets and the allocation of bargaining power.