Optimal Information and Security Design

Abstract An asset owner designs an asset-backed security and a signal about its value. After experiencing a liquidity shock and privately observing the signal, he sells the security to imperfectly competitive buyers. With flexible information design, the security’s informational sensitivity is a blessing, not a curse. Among double-monotone securities, the issuer prefers to sell the asset in combination with an appropriate signal rather than design more complex securities. Within the class of monotone securities, live-or-die securities are optimal and strictly dominate asset sales. When signals are restricted to be sufficiently informative about the upside, debt and additional-tier-1 debt become optimal. (JEL D82, D86, G32)