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 language | English |
---|---|
Pages (from-to) | 157-178 |
Number of pages | 22 |
Journal | Journal of Real Estate Finance and Economics |
Volume | 26 |
Issue number | 2-3 |
DOIs | |
State | Published - 1 Mar 2003 |
Keywords
- Asymmetric information
- Default
- Market efficiency
- Mortgage markets
- Mortgage maturity
- Risk premium
- Screening
- Separating equilibrium
- Signaling
- Welfare
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics
- Urban Studies