Signaling in Online Credit Markets
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 relativ...
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| Main Authors: | , , |
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| Format: | text |
| Language: | English |
| Published: |
Institutional Knowledge at Singapore Management University
2015
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| Subjects: | |
| Online Access: | https://ink.library.smu.edu.sg/soe_research/1733 https://ink.library.smu.edu.sg/context/soe_research/article/2732/viewcontent/Signaling_in_Online_Credit_Markets_wp.pdf |
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| Institution: | Singapore Management University |
| Language: | English |
| Summary: | 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). |
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