Asymmetric Information in Dynamic Contract Settings: Evidence from the Home Equity Credit Market
53 Pages Posted: 2 Oct 2007
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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Using Experimental Economics to Measure Social Capital and Predict Financial Decisions
-
Observing Unobservables: Identifying Information Asymmetries with a Consumer Credit Field Experiment
By Dean S. Karlan and Jonathan Zinman
-
Observing Unobservables: Identifying Information Asymmetries with a Consumer Credit Field Experiment
By Dean S. Karlan and Jonathan Zinman