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

29 Pages Posted: 30 May 2017

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: May 2017

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 endowment, and a lender uses 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. Applied to mortgage restructuring, our mechanism generates amplification of house‐price shocks through foreclosure spillovers. We also show that government intervention aimed at limiting foreclosures may have unintended consequences.

Suggested Citation

Kovrijnykh, Natalia and Livshits, Igor, Screening as a Unified Theory of Delinquency, Renegotiation, and Bankruptcy (May 2017). International Economic Review, Vol. 58, Issue 2, pp. 499-527, 2017. Available at SSRN: https://ssrn.com/abstract=2976606 or http://dx.doi.org/10.1111/iere.12225

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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