Screening as a Unified Theory of Delinquency, Renegotiation and Bankruptcy

Igor Livshits and Natalia Kovrijnykh ()

No 1014, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: We propose a simple 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 absence of renegotiation, delinquency leads to bankruptcy. Presence of competition may induce the incumbent lender to renegotiate even when he would not do so in the monopoly setting. We apply the model to analyze effects of a government intervention in debt restructuring. 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: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2013/paper_1014.pdf (application/pdf)

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)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed013:1014

Access Statistics for this paper

More papers in 2013 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().