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Worst of the good and best of the bad Adverse selection consequences of risk pricing

Worst of the good and best of the bad Adverse selection consequences of risk pricing Why do lenders shrink back from full risk pricing in certain credit markets, even when a sophisticated system of credit scoring is already in place? Fear of bad publicity is the usual reason cited but this paper offers a complementary explanation which suggests that there may be an underlying financial process driving such behaviour. The key proposition of the paper is that risk pricing can cause adverse selection which has the potential to mitigate any positive benefits such a pricing strategy may bring to the lender. This explanation is developed by introducing risk pricing into the seminal Stiglitz and Weiss model and in so doing offers the first substantial link between the risk assessment and credit rationing literatures. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Property Investment & Finance Emerald Publishing

Worst of the good and best of the bad Adverse selection consequences of risk pricing

Journal of Property Investment & Finance , Volume 21 (6): 23 – Dec 1, 2003

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Publisher
Emerald Publishing
Copyright
Copyright © 2003 MCB UP Ltd. All rights reserved.
ISSN
1463-578X
DOI
10.1108/14635780310508621
Publisher site
See Article on Publisher Site

Abstract

Why do lenders shrink back from full risk pricing in certain credit markets, even when a sophisticated system of credit scoring is already in place? Fear of bad publicity is the usual reason cited but this paper offers a complementary explanation which suggests that there may be an underlying financial process driving such behaviour. The key proposition of the paper is that risk pricing can cause adverse selection which has the potential to mitigate any positive benefits such a pricing strategy may bring to the lender. This explanation is developed by introducing risk pricing into the seminal Stiglitz and Weiss model and in so doing offers the first substantial link between the risk assessment and credit rationing literatures.

Journal

Journal of Property Investment & FinanceEmerald Publishing

Published: Dec 1, 2003

Keywords: Credit institutions; Credit management; Premium pricing; Risk assessment

References

  • Credit Rationing and the Commercial Loan Market
    Jaffee, D.M.
  • Current wealth and tenure choice
    Jones, L.
  • Rationing, mortgage demand and the impact of financial deregulation
    Leece, D.
  • The impacts of borrowing constraints on homeownership
    Linneman, P.; Wachter, S.M.
  • The measurement of rationing and the treatment of structural change in the UK mortgage market
    Meen, G.P.
  • The removal of mortgage market constraints and the implications for econometric modeling of UK house prices
    Meen, G.P.
  • Mobility‐tenure decisions and financial credit: do mortgage qualification requirements constrain homeownership?
    Zorn, P.

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