Signaling in Online Credit Markets

54 Pages Posted: 13 Dec 2012 Last revised: 5 Aug 2015

See all articles by Kei Kawai

Kei Kawai

University of California at Berkeley

Ken Onishi

Singapore Management University

Kosuke Uetake

Yale School of Management

Date Written: August 2014

Abstract

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

Kawai, Kei and Onishi, Ken and Uetake, Kosuke, Signaling in Online Credit Markets (August 2014). Available at SSRN: https://ssrn.com/abstract=2188693 or http://dx.doi.org/10.2139/ssrn.2188693

Kei Kawai

University of California at Berkeley ( email )

Berkeley, CA 94720
United States

Ken Onishi

Singapore Management University ( email )

90 Stamford Road
178903
Singapore

Kosuke Uetake (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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