From: Robin Hanson (rhanson@gmu.edu)
Date: Fri Jan 19 2001 - 18:27:48 MST
Chris Hibbert wrote:
> > 1) The bondholder needs to have private information about their
> > chances of success. If speculators know as much as the bondholder
> > does about the chances of success, the bond price would get bid up
> > to a value consistent with those chances, and the bondholder
> > couldn't make any profits by actually pursuing success.
>
> If some people buy because they can do something about reaching the
> goal, their "private information" is that they will take action if
> they get enough of the bonds. The speculators can't buy until they
> are sure that people who can do something have bought enough to make
> it worth their while to proceed. If the speculators beat the action
> takers to the market, they'll be preventing the bonds they buy from
> appreciating in value.
The private information can either be that they will take action if they
get enough bonds, in which case their intentions cannot be too obvious,
or their private information can be how many bonds they will end up
holding, in which case they cannot very predictably end up with
enough bonds to make it worth their while. But even if speculators
only hold a tiny fraction of bonds at all times, their expectations can
drive the price up to a point where the bondholders do not profit.
> > 2) For every buyer there is a seller. While a buyer has an
> > incentive to help the social policy, the seller has an incentive to
> > hurt that policy.
>
> There are holders, non-holders, future holders, and past holders.
> Holders care about success, the others don't. ... While a holder
> is in the process of selling, her incentive is to make the price
> higher. After she's sold, she doesn't care anymore. Someone who
> doesn't hold and is thinking of buying wants the price to be low.
> After he buys, he wants the price to be high.
The simplest case to explain would be if someone were selling
the bonds short. But there are other relevant cases as well.
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