Signaling in Online Credit Markets

• Main Authors: KAWAI, Kei, ONISHI, Ken, UETAKE, Kosuke
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2015
• Subjects: Signaling; Adverse Selection; Credit Markets; Structural Model; Economics; Finance
• 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
• Institution: Singapore Management University

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).