Signaling-Screening Equilibrium in the Mortgage Market

Signaling-Screening Equilibrium in the Mortgage Market The signaling model of Spence (1973a) and the screening model of Rothchild and Stiglitz (1976) have been separately used to explain economic phenomena when there is asymmetric information. In the real world, however, situations of asymmetric information often simultaneously involve signaling and screening. In this paper, we combine signaling and screening mechanisms and demonstrate a signaling-screening separating equilibrium. We present the analysis within the framework of mortgage markets. Borrowers signal their default risk types to lenders by acquiring different credit records. This partially separates borrowers into subsets. Lenders screen each subset by offering menus of mortgage loan contracts. Borrowers, then, self-select by choosing particular contracts from the menu. We show the conditions under which the signaling-screening equilibrium is Pareto superior to a screening-only equilibrium. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Real Estate Finance and Economics Springer Journals

Signaling-Screening Equilibrium in the Mortgage Market

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Publisher
Springer Journals
Copyright
Copyright © 2003 by Kluwer Academic Publishers
Subject
Economics; Regional/Spatial Science; Financial Services
ISSN
0895-5638
eISSN
1573-045X
D.O.I.
10.1023/A:1022926724657
Publisher site
See Article on Publisher Site

Abstract

The signaling model of Spence (1973a) and the screening model of Rothchild and Stiglitz (1976) have been separately used to explain economic phenomena when there is asymmetric information. In the real world, however, situations of asymmetric information often simultaneously involve signaling and screening. In this paper, we combine signaling and screening mechanisms and demonstrate a signaling-screening separating equilibrium. We present the analysis within the framework of mortgage markets. Borrowers signal their default risk types to lenders by acquiring different credit records. This partially separates borrowers into subsets. Lenders screen each subset by offering menus of mortgage loan contracts. Borrowers, then, self-select by choosing particular contracts from the menu. We show the conditions under which the signaling-screening equilibrium is Pareto superior to a screening-only equilibrium.

Journal

The Journal of Real Estate Finance and EconomicsSpringer Journals

Published: Oct 4, 2004

References

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