Screening as a Unified Theory of Delinquency, Renegotiation, and Bankruptcy

Igor Livshits and Natalia Kovrijnykh
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Natalia Kovrijnykh: Arizona State University

No 1401, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: We propose a parsimonious model with adverse selection where delinquency, renegotiation, and bankruptcy all occur in equilibrium as a result of a simple screening mechanism. A borrower has private information about her cost of bankruptcy, and a lender may use random contracts to screen different types of borrowers. In equilibrium, some borrowers choose not to repay, and thus become delinquent. The lender renegotiates with some delinquent borrowers. In the absence of renegotiation, delinquency leads to bankruptcy. We apply the model to analyze effects of a government intervention in debt restructuring. We show that a mortgage modification program aimed at limiting foreclosures that fails to take into account private debt restructuring may have the opposite effect from the one intended.

Date: 2015
New Economics Papers: this item is included in nep-mic
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Related works:
Working Paper: Screening as a Unified Theory of Delinquency, Renegotiation, and Bankruptcy (2013)
Working Paper: Screening as a Unified Theory of Delinquency, Renegotiation and Bankruptcy (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:1401

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