Abstract
This paper studies the mechanism of adverse selection in the credit market using a sample of mortgage applications that are approved by lenders but rejected by applicants. We find that a low-risk applicant is more likely to reject a loan offer, except when the offer is made by an informed lender. Using jumbo mortgage and loan acceptance rate data to proxy for the information advantage, we find that lenders with a lower likelihood of being rejected are indeed better informed than others.
Original language | English |
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Article number | 105339 |
Pages (from-to) | 1-15 |
Number of pages | 15 |
Journal | Journal of Banking and Finance |
Volume | 119 |
Early online date | 16 May 2018 |
DOIs | |
Publication status | Published - Oct 2020 |
Funding
Bai is grateful to Steven Ongena and Neeltje Van Horen for their valuable advice and guidance. This paper has benefited from discussions with Lieven Baele, Fabio Braggion, Marco Da Rin, Cem Demiroglu, Peter De Goeij, Olivier De Jonghe, Joost Driessen, Qing He, Alberto Manconi, Maria Fabiana Penas, Luc Renneboog, Timothy Riddiough, Yuji Sakurai, Oliver Spalt, and Wolf Wagner, and seminar participants at Tilburg University, University of International Business and Economics, Renmin University of China, Chinese Academy of Finance and Development, Shanghai University of Finance and Economics, Huazhong University of Science and Technology, Nanjing University and Jilin University, and participants at the 5th FEBS conference 2015 in Nantes, the 7th IFABS conference in Hangzhou and 5th Auckland Finance Meeting in Auckland. Bai acknowledges the financial support from the corporate finance research team in School of Finance at Zhongnan University of Economics and Law, the Fundamental Research Funds for the Central Univerties (2017QN034), and National Natural Science Foundation of China (No. 71601186 and 71772178 ). Lu acknowledges the financial support from National Natural Science Foundation of China (No. 71603225 ), and National Social Science Foundation of China (No. 15ZDA027).
Funders | Funder number |
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5th Auckland Finance Meeting | |
Chinese Academy of Finance and Development | |
National Social Science Foundation of China | 15ZDA027 |
Zhongnan University of Economics and Law | |
University of International Business and Economics | |
National Natural Science Foundation of China | 71601186, 71772178, 71603225 |
Huazhong University of Science and Technology | |
Jilin University | |
Renmin University of China | |
Universiteit van Tilburg | |
Shanghai University of Finance and Economics | |
Nanjing University | |
Fundamental Research Funds for the Central Universities | 2017QN034 |
Keywords
- Concentrated lender
- Information advantage
- Mortgage lending