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Two-Dimensional Self-Selection of Borrowers

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  • Sung Hyun Kim

    (Ewha Womans University)

Abstract

The multi-dimensional heterogeneity of agents can provide interesting insights. To illustrate this point in the loan market context, we examine the borrowers’ decision to switch from a variable rate loan to a fixed rate loan, using a model of two-dimensional borrower types (risk aversion and riskiness). Among high risk borrowers, more risk averse ones are selected out of the loan market and less risk averse ones are not tempted by the fixed rate loan. Switchers are more risk averse but have lower default risk. The Financial Services Commission’s 2015 Mortgage Refinancing Program in Korea is discussed under our model’s framework.

Suggested Citation

  • Sung Hyun Kim, 2019. "Two-Dimensional Self-Selection of Borrowers," Korean Economic Review, Korean Economic Association, vol. 35, pages 125-161.
    • Handle: RePEc:kea:keappr:ker-20190101-35-1-05
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Self-Selection; Mortgage Choice; ARM; Gamma Distribution;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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