Signaling in Online Credit Markets

Kei Kawai, Ken Onishi and Kosuke Uetake

No 29268, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study how signaling affects equilibrium outcomes and welfare in an online credit market using detailed data on loan characteristics and borrower repayment. We build and estimate an equilibrium model in which a borrower may signal her default risk through the reserve interest rate. Comparing a market with and without signaling relative to the benchmark with no asymmetric information, we find that adverse selection destroys as much as 34% of total surplus, up to 78% of which can be restored with signaling. We also estimate backward-bending supply curves for some markets, consistent with the prediction of Stiglitz & Weiss (1981).

JEL-codes: D82 G21 L15 (search for similar items in EconPapers)
Date: 2021-09
New Economics Papers: this item is included in nep-ban, nep-com, nep-isf and nep-pay
Note: IO
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Published as Kei Kawai & Ken Onishi & Kosuke Uetake, 2022. "Signaling in Online Credit Markets," Journal of Political Economy, vol 130(6), pages 1585-1629.

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