Credit-rationing model similar to Stiglitz and Weiss [1981] is combined with the information externality model of Lang and Nakamura [1993] to examine the properties of mortgage markets characterized by both adverse selection and information externalities. In a credit-rationing model, additional information increases lenders ability to distinguish risks, which leads to increased supply of credit. According to Lang and Nakamura, larger supply of credit leads to additional market activities and therefore, greater information. The combination of these two propositions leads to a general equilibrium model. This paper describes properties of this general equilibrium model. The paper provides another sufficient condition in which credit rationing falls with information. In that, external information improves the accuracy of equity-risk assessments of properties, which reduces credit rationing. Contrary to intuition, this increased accuracy raises the mortgage interest rate. This allows clarifying the trade offs associated with reduced credit rationing and the quality of applicant pool.
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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number
2005-11.
Length: 61 pages Date of creation: Apr 2005 Date of revision: Handle: RePEc:uct:uconnp:2005-11
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Find related papers by JEL classification: C62 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Existence and Stability Conditions of Equilibrium R31 - Urban, Rural, and Regional Economics - - Production Analysis and Firm Location - - - Housing Supply and Markets R51 - Urban, Rural, and Regional Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies
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