We study how signaling affects equilibrium outcomes and welfare in markets with adverse selection. Using data from an online credit market, we estimate a model of borrowers and lenders where low reserve interest rates can signal low default risk. Comparing a market with and without signaling relative to the benchmark case with no asymmetric information, we find that adverse selection destroys as much as 16% of total surplus, up to 95% of which can be restored with signaling. We also find the credit supply curves to be backward-bending for some markets, consistent with the prediction of Stiglitz and Weiss (1981).
Signaling, Adverse Selection, Credit Markets, Structural Model
Economics | Finance
KAWAI, Kei; ONISHI, Ken; and UETAKE, Kosuke.
Signaling in Online Credit Markets. (2015). 1-54. Research Collection School Of Economics.
Available at: http://ink.library.smu.edu.sg/soe_research/1733
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