Knowledge that Transforms

Exploiting the analogy with the private provision of a public good, this paper studies debt restructuring with an arbitrary number of creditors using mechanism design. Creditors differ in the value they expect to receive in bankruptcy, and this value is private information. As with public goods, too little debt forgiveness is granted in equilibrium relative to the first best. Creditors are more willing to make concessions under common values than under pure private values, an opposite phenomenon to the “winners' curse” in auctions. Exchange offers are an optimal restructuring scheme for the debtor, because they allow creditors to contribute to debt forgiveness at different levels.Journal of Economic LiteratureClassification Numbers: G34, G33.

Many recommendations for reforming securities markets are predicated on the belief that providing information on order flow and other market variables to traders (i.e., increasingmarket transparency) will increase liquidity and improve price efficiency. This paper demonstrates that market transparency can actually increase price volatility and lower market liquidity. This occurs even though transparency increases the precision of traders' predictions about the asset's value. In a sufficiently large market, transparency always reduces volatility and improves market quality. We use these results to assess various policy proposals concerning the disclosure of trading information.Journal of Economic Literature Classification Numbers:D82, D83, G12, G14.