Signaling-Screening Equilibrium in the Mortgage Market

Danny Ben-Shahar*, David Feldman

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

13 Scopus citations

Abstract

The signaling model of Spence (1973a) and the screening model of Rothchild and 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.

Original languageEnglish
Pages (from-to)157-178
Number of pages22
JournalJournal of Real Estate Finance and Economics
Volume26
Issue number2-3
DOIs
StatePublished - Mar 2003
Externally publishedYes

Keywords

  • Asymmetric information
  • Default
  • Market efficiency
  • Mortgage markets
  • Mortgage maturity
  • Risk premium
  • Screening
  • Separating equilibrium
  • Signaling
  • Welfare

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