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Asymmetric Information and Fragility in the South African Low-Income Housing Market

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  • Laura Ebert

    (Economics Department, University of Akron)

Abstract

This paper focuses on the financing gap in the South African low-income housing market. A model is presented to analyze the effect of asymmetric information on the loan market notably lenders¡¯ need to separate low from high-risk African borrowers. In equilibrium the separation contract is shown to reduce total loans and the size of loans. In addition, it results in greater sensitivity among lenders to factors that might reduce the valuation of collateral (the house) such as poor quality construction, inferior infrastructure, crime and corruption. This puts upward pressure on the already high cost of loans, which in turn drives out the remaining low risk borrowers. The paper concludes with policy recommendations to close financing gaps under asymmetric information.

Suggested Citation

  • Laura Ebert, 2001. "Asymmetric Information and Fragility in the South African Low-Income Housing Market," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 26(2), pages 91-106, December.
    • Handle: RePEc:jed:journl:v:26:y:2001:i:2:p:91-106
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    References listed on IDEAS

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    1. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-855, September.
    2. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
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