Testing for Adverse Selection and Moral Hazard in Consumer Loan Markets

Topics:
Insurance
Tags:
Borrower,
Operational Accounting,
Mortgages,
Interest Rate,
Income,
Hazard,
Financial Services,
Financial Planning,
Finance,
Federal Reserve Board,
...
Source:
Federal Reserve Board

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Overview: This paper explores the significance of unobservable default risk in mortgage and automobile loan markets. It develops and estimates a two-period model that allows for heterogeneous forms of simultaneous adverse selection and moral hazard. Controlling for income levels, loan size and risk aversion, It finds robust evidence of adverse selection, with borrowers self-selecting into contracts with varying interest rates and collateral requirements. For example, ex-post higher-risk borrowers pledge less collateral and pay higher interest rates.

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Format: PDF | Size: 658KB | Date: Feb 2004 | Pages: 42

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