Signaling and Indeterminacy of Equilibria in Unsecured Credit and Insurance Markets

Mishra Shreemoy ()
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Mishra Shreemoy: Vassar College

The B.E. Journal of Economic Analysis & Policy, 2010, vol. 10, issue 1, 47

Abstract: I study strategic behavior under 'credit-based insurance.' It is assumed that higher consumer credit scores are associated with lower risk for insurable losses. Even when default is costless, some borrowers repay loans as a signal of low risk-type to insurers. There are multiple equilibria and equilibrium refinement techniques have no bite. The equilibrium amount of debt is indeterminate. For low credit scores, equilibrium involves randomization between default and repayment. This can explain the 'hockey-stick' shape of interest rates observed in several markets. Perfect information about consumer risk-type can lead to credit-market failure and lower welfare.

Keywords: credit-based insurance; credit score; unsecured credit (search for similar items in EconPapers)
Date: 2010
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DOI: 10.2202/1935-1682.2220

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