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Signaling in Online Credit Markets

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  • Kei Kawai
  • Ken Onishi
  • Kosuke Uetake

Abstract

We study how signaling affects equilibrium outcomes and welfare in an online credit market, using detailed data on loan characteristics and borrower repayment. We build and estimate an equilibrium model in which a borrower may signal her default risk through the reserve interest rate. Comparing markets with and without signaling relative to the benchmark with no asymmetric information, we find that adverse selection destroys as much as 34% of total surplus, up to 78% of which can be restored with signaling. We also estimate backward-bending supply curves for some markets, consistent with the prediction made by Stiglitz and Weiss in 1981.

Suggested Citation

  • Kei Kawai & Ken Onishi & Kosuke Uetake, 2022. "Signaling in Online Credit Markets," Journal of Political Economy, University of Chicago Press, vol. 130(6), pages 1585-1629.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/718984
    DOI: 10.1086/718984
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    Cited by:

    1. Pavanini, Nicola & Braggion, Fabio & Manconi, Alberto & Zhu, Haikun, 2022. "The Value of Financial Intermediation: Evidence from Online Debt Crowdfunding," CEPR Discussion Papers 14740, C.E.P.R. Discussion Papers.

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