Securitization and aggregate investment efficiency

Abstract

This paper studies the efficiency of competitive equilibria in economies where the expansion of investment is facilitated by securitization. We show that the use of securitization is generally associated with constrained inefficient aggregate investment, thereby potentially justifying regulatory intervention in markets for securitized assets. We examine the effectiveness of two real-world policy instruments to address this inefficiency: ex-ante capital / leverage requirements, as well as skin-in-the game (retention) requirements. We find that leverage/capital restrictions can increase welfare in our environment, but that forcing originators to hold additional skin-in-the game is not welfare improving.