A Signaling-Screening Equilibrium in the Mortgage Market
||Ben-Shahar, Danny; Feldman, David
||A Signaling-Screening Equilibrium in the Mortgage Market
||8th European Real Estate Society Conference (26-29 June 2001) Alicante, Spain
||Screening equilibria, mainly those a la Rothchild-Stiglitz(1976), have been widely used to explain various aspects of mortgage contracting. In the real world, however, most mortghage contracting processes involve both signalling and screening. In this paper, we combine signalling and screening mechanisms to examine a mortgage selection process. Borrowers “buy” different credit histories, signalling their default risk type to lenders. Credit histories, however, are imperfect signals and only partially separate borrowers’ risk types, clustering them into subsets. Then, lenders screen each subset by offering a different menu. In equilibrium, safer (riskier) borrowers maintain a better (worse) credit record and choose shorter (longer) matutity and lower (higher) risk premium mortgage loan contracts. We further show that the separating signalling-screening equilibrium is Pareto superior to a corresponding screening equilibrium.
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||Equilibrium in Mortgages Market
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