Asymmetric Information in Dynamic Contract Settings: Evidence from the Home Equity Credit Market

53 Pages Posted: 2 Oct 2007

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Brent W. Ambrose

Pennsylvania State University

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC)

Chunlin Liu

University of Nevada, Reno - College of Business

Abstract

We analyze more than 108,000 home equity loans and lines of credits to study the role of information asymmetry in a credit market where borrowers face a menu of contract options and a lender uses a counteroffer to further mitigate contract frictions. Our results reveal that a less credit-worthy applicant is more likely to select a credit contract that requires less collateral. Further analysis on borrower repayment behavior ex post indicates that the lender may face adverse selection due to private information, controlling for observable risk attributes. We also find that systematic screening ex ante by a lender to mitigate contract frictions can effectively reduce overall credit losses ex post.

Keywords: Asymmetric Information, Contract Frictions, Screening, Banking, Home Equity Lending

JEL Classification: D1, D8, G21

Suggested Citation

Agarwal, Sumit and Ambrose, Brent W. and Chomsisengphet, Souphala and Liu, Chunlin, Asymmetric Information in Dynamic Contract Settings: Evidence from the Home Equity Credit Market. Available at SSRN: https://ssrn.com/abstract=1017883 or http://dx.doi.org/10.2139/ssrn.1017883

Sumit Agarwal (Contact Author)

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Brent W. Ambrose

Pennsylvania State University ( email )

University Park, PA 16802-3306
United States
814-867-0066 (Phone)
814-865-6284 (Fax)

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street, SW
Washington, DC 20219
United States
202-649-5533 (Phone)

Chunlin Liu

University of Nevada, Reno - College of Business ( email )

University of Nevada, Reno
Reno, NV 89557-0016
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
182
Abstract Views
1,580
rank
166,877
PlumX Metrics