Abstract
This paper studies the optimality of pooling and tranching for a privately informed security originator facing buyers endowed with market power (perhaps due to liquidity shortages). Contrary to the standard result that pooling and tranching are optimal practices, we find that selling assets separately may be preferred by originators. In this environment, originators sell securities separately to avoid being inefficiently screened by buyers with market power. Our results shed light on observed time-variations in the practice of pooling and tranching in financial markets, in particular, the dramatic decline in the size of the ABS market following the most recent financial crisis.
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