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Marking to Market versus Taking to Market

Listed author(s):
  • Guillaume Plantin

    (Département d'économie)

  • Jean Tirole

    (Toulouse School of Economics)

While the debate on cost and market-value accounting has been raging for years, economists lack a framework allowing a comparison of their relative merits. This paper considers an agency model in which the measurement of an asset can be based on public market data (marking to market) and/or on the realization of its value through costly resale to an informed buyer (taking to market). At the optimal contract, noisier market data lead to cost accounting and gains trading (selling winners/keeping losers) whereas accurate data naturally favor market-value accounting. The quality of market data and the magnitude of resale costs both depend on the volume of transactions, and therefore on accounting rules. The paper studies the mutual feedback between individually optimal accounting rules and asset market liquidity. This equilibrium approach reveals a socially excessive use of market-value accounting that dries up market liquidity and reduces the informativeness of price signals.

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File URL: http://spire.sciencespo.fr/hdl:/2441/7pu0mfr14h9ba9rsrotsskha8c/resources/2016-plantin-marking-to-market.pdf
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Paper provided by Sciences Po in its series Sciences Po publications with number info:hdl:2441/7pu0mfr14h9ba9rsrotsskha8c.

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Date of creation: Nov 2016
Handle: RePEc:spo:wpmain:info:hdl:2441/7pu0mfr14h9ba9rsrotsskha8c
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  1. repec:adr:anecst:y:1994:i:34 is not listed on IDEAS
  2. Bernard Elyakime & Jean-Jacques Laffont & Patrice Loisel & Quang Vuong, 1994. "First-Price Sealed-Bid Auctions with Secret Reservation Prices," Annals of Economics and Statistics, GENES, issue 34, pages 71-114.
  3. Philippe Jehiel & Laurent Lamy, 2015. "On Discrimination in Auctions with Endogenous Entry," American Economic Review, American Economic Association, vol. 105(8), pages 2595-2643, August.
  4. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
  5. Philippe Jehiel & Laurent Lamy, 2011. "Absolute auctions and secret reserve prices: Why are they used?," Levine's Working Paper Archive 786969000000000316, David K. Levine.
  6. Ronald A. Dye, 1986. "Optimal Monitoring Policies in Agencies," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 339-350, Autumn.
  7. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
  8. repec:adr:anecst:y:1994:i:34:p:04 is not listed on IDEAS
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