Abstract

http://ssrn.com/abstract=319884
 
 

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Signaling-Screening Equilibrium in the Mortgage Market


Danny Ben-Shahar


Technion - Israel Institute of Technology

David Feldman


University of New South Wales - Banking & Finance, Australian School of Business; Financial Research Network (FIRN)


Journal of Real Estate Finance and Economics, Vol. 26, pp. 157-178, 2003

Abstract:     
The signaling model of Spence (1973a) and the screening model of Rothchild-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.

Keywords: Signaling, screening, separating equilibrium, asymmetric information, mortgage markets, default, mortgage maturity, risk premium, welfare, market efficiency

JEL Classification: D82, G21, R29

Accepted Paper Series


Not Available For Download

Date posted: October 4, 2002  

Suggested Citation

Ben-Shahar, Danny and Feldman, David, Signaling-Screening Equilibrium in the Mortgage Market. Journal of Real Estate Finance and Economics, Vol. 26, pp. 157-178, 2003. Available at SSRN: http://ssrn.com/abstract=319884

Contact Information

Danny Ben-Shahar (Contact Author)
Technion - Israel Institute of Technology ( email )
Faculty of Architecture and Town Planning
Technion City
Haifa, 32000
Israel
David Feldman
University of New South Wales - Banking & Finance, Australian School of Business ( email )
UNSW Sydney, NSW 2052
Australia
+61 2 9385 5748 (Phone)
+61 2 9385 6347 (Fax)
Financial Research Network (FIRN)
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia
HOME PAGE: http://www.firn.org.au

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