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Does Buyer Knowledge of Seller's Initial Purchase Price Impact Housing Prices? A Behavioral Study on Anchoring and Multiple Reference Points

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  • Economics

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179.PDF A SIGNALING-SCREENING EQULIBRIUM IN THEMORTGAGE MARKET Danny Ben-Shahar* and David Feldman** PRELIMINARY INCOMPELETE DRAFT March 1, 2001 Abstract Screening equilibria, mainly those a la Rothchild-Stiglitz (1976), have been widely used to explain various aspects of mortgage contracting. In the real world, however, most mortgage contracting processes involve both signaling and screening. In this paper, we combine signaling and screening mechanisms to examine a mortgage selection process. Borrowers “buy” different credit histories, signaling their default risk type to lenders. Credit histories, however, are imperfect signals and only partially separate borrowers’ risk types, clustering them into subsets. Then, lenders screen each subset by offering a different menu of mortgage loan contracts with varying pairs of interest rate and maturity. Borrowers, then, self-select by choosing a particular contract from the menu. In equilibrium, safer (riskier) borrowers maintain a better (worse) credit record and choose shorter (longer) maturity and lower (higher) risk premium mortgage loan contracts. We further show that the separating signaling- screening equilibrium is Pareto superior to a corresponding screening equilibrium. Copyright © 2001 Danny Ben-Shahar and David Feldman *The Arison School of Business, The Interdisciplinary Center Herzliya; P.O. Box 167, Herzliya 46150, Israel; telephone: +972-9-952-7298, fax: 09-956-8605, email: [email protected] **Department of Business Administration, School of Management, Ben-Gurion University of the Negev, P.O. Box 653, Beer-Sheva 84105, ISRAEL and the Technion – Israel Institute of Technology, Faculty of Industrial Engineering and Management; telephone: +972-8-647-2106, fax 08-647-7691, email: [email protected] 1 1 Introduction Screening equilibria, mainly those a la Rothchild-Stiglitz (1976), have been widely used to explain various aspects of mort

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