SCREENING AS A UNIFIED THEORY OF DELINQUENCY, RENEGOTIATION, AND BANKRUPTCY

Natalia Kovrijnykh and Igor Livshits

International Economic Review, 2017, vol. 58, issue 2, 499-527

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 endowment, and a lender uses 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. Applied to mortgage restructuring, our mechanism generates amplification of house‐price shocks through foreclosure spillovers. We also show that government intervention aimed at limiting foreclosures may have unintended consequences.

Date: 2017
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https://doi.org/10.1111/iere.12225

Related works:
Working Paper: Screening as a Unified Theory of Delinquency, Renegotiation, and Bankruptcy (2015)
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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