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A Signaling-Screening Equilibrium in the Mortgage Market

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  • Danny Ben-Shahar
  • David Feldman

Abstract

Screening equilibria, mainly those a la Rothchild-Stiglitz(1976), have been widely used to explain various aspects of mortgage contracting. In the real world, however, most mortghage contracting processes involve both signalling and screening. In this paper, we combine signalling and screening mechanisms to examine a mortgage selection process. Borrowers ìbuyî different credit histories, signalling their default risk type to lenders. Credit histories, however, are imperfect signals and only partially separate borrowersí risk types, clustering them into subsets. Then, lenders screen each subset by offering a different menu. In equilibrium, safer (riskier) borrowers maintain a better (worse) credit record and choose shorter (longer) matutity and lower (higher) risk premium mortgage loan contracts. We further show that the separating signalling-screening equilibrium is Pareto superior to a corresponding screening equilibrium.

Suggested Citation

  • Danny Ben-Shahar & David Feldman, 2001. "A Signaling-Screening Equilibrium in the Mortgage Market," ERES eres2001_117, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2001_117
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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