Screening as a Unified Theory of Delinquency, Renegotiation, and Bankruptcy

28 Pages Posted: 9 Jan 2015

See all articles by Natalia Kovrijnykh

Natalia Kovrijnykh

Arizona State University (ASU) - Economics Department

Igor Livshits

Federal Reserve Bank of Philadelphia; University of Western Ontario - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2013

Abstract

We propose a parsimonious model with adverse selection where delinquency, renegotiation, and bankruptcy all occur in equilibrium as a result of a simple screening mechanism. A borrower has private information about her cost of bankruptcy, and a lender may use random contracts to screen different types of borrowers. In equilibrium, some borrowers choose not to repay, and thus become delinquent. The lender renegotiates with some delinquent borrowers. In the absence of renegotiation, delinquency leads to bankruptcy. We apply the model to analyze effects of a government intervention in debt restructuring. We show that a mortgage modification program aimed at limiting foreclosures that fails to take into account private debt restructuring may have the opposite effect from the one intended.

Keywords: Default, Delinquency, Bankruptcy, Renegotiation, Adverse Selection, Screening, Consumer Credit

JEL Classification: D14, D82, D86, G18, G21

Suggested Citation

Kovrijnykh, Natalia and Livshits, Igor, Screening as a Unified Theory of Delinquency, Renegotiation, and Bankruptcy (November 1, 2013). Available at SSRN: https://ssrn.com/abstract=2546449 or http://dx.doi.org/10.2139/ssrn.2546449

Natalia Kovrijnykh (Contact Author)

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States

HOME PAGE: http://www.public.asu.edu/~nkovrijn

Igor Livshits

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

University of Western Ontario - Department of Economics ( email )

London, Ontario N6A 5B8
Canada

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