Transparency and collateral: Central versus bilateral clearing

This paper studies the optimal clearing arrangement for bilateral financial contracts in which an assessment of counterparty credit risk is crucial efficiency. The economy populated by borrowers and lenders. Borrowers are subject to limited commitment hold private information about severity such lack commitment. Lenders can acquire information, at a cost, their borrowers, affects risk. Clearing through central allows lenders mutualize risk, but this insurance may weaken incentives reveal information. If acquisition incentive‐compatible, then choose clearing. it not, they prefer either prevent strategic default or optimize allocation costly collateral.