Signaling in Online Credit Markets
54 Pages Posted: 13 Dec 2012 Last revised: 5 Aug 2015
Date Written: August 2014
We study how signaling affects equilibrium outcomes and welfare in markets with adverse selection. Using data from an online credit market, we estimate a model of borrowers and lenders where low reserve interest rates can signal low default risk. Comparing a market with and without signaling relative to the benchmark case with no asymmetric information, we find that adverse selection destroys as much as 16% of total surplus, up to 95% of which can be restored with signaling. We also find the credit supply curves to be backward-bending for some markets, consistent with the prediction of Stiglitz and Weiss (1981).
Keywords: Signaling, Adverse Selection, Credit Markets, Structural Model
JEL Classification: D82, G14
Suggested Citation: Suggested Citation