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Signaling-Screening Equilibrium in the Mortgage Market

Posted: 4 Oct 2002  

Danny Ben-Shahar

Tel Aviv University

David Feldman

Banking and Finance, UNSW Business School, UNSW Sydney; Financial Research Network (FIRN)

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The signaling model of Spence (1973a) and the screening model of Rothchild-Stiglitz (1976) have been separately used to explain economic phenomena when there is asymmetric information. In the real world, however, situations of asymmetric information often simultaneously involve signaling and screening. In this paper, we combine signaling and screening mechanisms and demonstrate a signaling-screening separating equilibrium. We present the analysis within the framework of mortgage markets. Borrowers signal their default risk types to lenders by acquiring different credit records. This partially separates borrowers into subsets. Lenders screen each subset by offering menus of mortgage loan contracts. Borrowers, then, self-select by choosing particular contracts from the menu. We show the conditions under which the signaling-screening equilibrium is Pareto superior to a screening-only equilibrium.

Keywords: Signaling, screening, separating equilibrium, asymmetric information, mortgage markets, default, mortgage maturity, risk premium, welfare, market efficiency

JEL Classification: D82, G21, R29

Suggested Citation

Ben-Shahar, Danny and Feldman, David, Signaling-Screening Equilibrium in the Mortgage Market. Journal of Real Estate Finance and Economics, Vol. 26, pp. 157-178, 2003. Available at SSRN:

Danny Ben-Shahar (Contact Author)

Tel Aviv University ( email )

Tel Aviv

David Feldman

Banking and Finance, UNSW Business School, UNSW Sydney ( email )

UNSW Sydney, NSW 2052
+61 2 9385 5748 (Phone)
+61 2 9385 6347 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane


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