Potential Competition in Preemption Games

We consider a preemption game with two potential competitors who come into play at some random secret times. The presence of a competitor is revealed to a player only when the former moves, which terminates the game. We show that all perfect Bayesian equilibria give rise to the same distribution of players' moving times. Moreover, there exists a unique perfect Bayesian equilibrium in which each player's behavior from any time on is independent of the date at which she came into play. We find that competitive pressure is nonmonotonic over time, and that private information tends to alleviate rent dissipation. Our results have a natural interpretation in terms of eroding reputations.

Strategic Liquidity Supply and Security Design

We study how securities and trading mechanisms can be designed to optimally mitigate the adverse impact of market imperfections on liquidity. Asset owners seek to obtain liquidity by selling their claims on future cash-flows, on which they have private information. Our analysis encompasses both the cases of competitive and monopolistic liquidity supply. In the optimal trading mechanism associated to an arbitrary given security, issuers with low cash-flows sell their entire holdings of the security, while issuers with larger cash-flows are typically excluded from trade. By designing the security optimally, issuers can eshew exclusion altogether. The optimal security is debt. Because of its low informational sensitivity, debt mitigates the adverse selection problem. Furthermore, by pooling all issuers with high cash-flows, debt also reduces the ability of a monopolistic liquidity supplier to exclude them from trade in order to better extract rents from issuers with low cash-flows.Security design, liquidity, mechanism design, adverse selection, financial markets imperfections.