Optimal Security Design for Risk-Averse Investors

We use the tools of mechanism design combined with the theory of risk measures to analyze how a cash-constrained owner of an asset with known, stochastic returns raises capital from a population of investors who differ in their risk aversion and budget constraints. The issuer partitions the asset’s cash flow into several asset-backed securities, one for each type of investor. The optimal partition conforms to the commonly observed practice of tranching into senior debt, junior debt, and equity. Tranching arises endogenously due to the differences in risk appetites among agents and in the budget constraints they face. (JEL D81, D82, G12, G41, G51)

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Publication Details

Journal
American Economic Review
Published
2025-05-30
DOI
https://doi.org/10.1257/aer.20231597
Citations
2
Primary Topic
Banking stability, regulation, efficiency
Type
article
Field-Weighted Citation Impact
4.42
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article

Optimal Security Design for Risk-Averse Investors

Philipp Strack, Alex Gershkov, Benny Moldovanu, Mengxi Zhang
2 citations
American Economic Review
Banking stability, regulation, efficiency
4.42
article

Optimal Security Design for Risk-Averse Investors

Philipp Strack, Alex Gershkov, Benny Moldovanu, Mengxi Zhang
article en
2 citations

Abstract

We use the tools of mechanism design combined with the theory of risk measures to analyze how a cash-constrained owner of an asset with known, stochastic returns raises capital from a population of investors who differ in their risk aversion and budget constraints. The issuer partitions the asset’s cash flow into several asset-backed securities, one for each type of investor. The optimal partition conforms to the commonly observed practice of tranching into senior debt, junior debt, and equity. Tranching arises endogenously due to the differences in risk appetites among agents and in the budget constraints they face. (JEL D81, D82, G12, G41, G51)

American Economic ReviewVol. 115(6)
University of Bonn (DE), Hebrew University of Jerusalem (IL), University of Surrey (GB), Yale University (US)
Openalex Percentile: Top 6%
Banking stability, regulation, efficiency
4.42
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Optimal Security Design for Risk-Averse Investors — Philipp Strack, Alex Gershkov, et al. · American Economic Review (2025) | TGRS Research Map | TGRS