Planned Opaqueness in Securitization

Issuers of structured finance products can exploit the informational advantage over potential buyers via two ways. One way is to adopt lax screening standards, and simply pass off the risks to potential buyers. The other way is to make securities intentionally opaque and difficult to evaluate their risks and values through repackaging, and thereby amplifying informational advantage. When the screening standard is exogenously given, repackaging is welfare-reducing. However, we show not only that the issuer chooses to repackage, but also that repackaging mitigates the adverse selection and can be welfare-improving, because the incentive to enjoy additional informational advantage through repackaging improves screening standards.