Asymmetric Information and Fragility in the South African Low-Income Housing Market

Laura Ebert ()
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Laura Ebert: Economics Department, University of Akron

Journal of Economic Development, 2001, vol. 26, issue 2, 91-106

Abstract: This paper focuses on the financing gap in the South African low-income housing market. A model is presented to analyze the effect of asymmetric information on the loan market notably lenders¡¯ need to separate low from high-risk African borrowers. In equilibrium the separation contract is shown to reduce total loans and the size of loans. In addition, it results in greater sensitivity among lenders to factors that might reduce the valuation of collateral (the house) such as poor quality construction, inferior infrastructure, crime and corruption. This puts upward pressure on the already high cost of loans, which in turn drives out the remaining low risk borrowers. The paper concludes with policy recommendations to close financing gaps under asymmetric information.

Date: 2001
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