|
on Contract Theory and Applications |
| By: | Liu, Lu (The Wharton School, University of Pennsylvania) |
| Abstract: | Long-term fixed-rate mortgage contracts protect households against interest rate risk, yet most countries have relatively short interest rate fixation lengths. Using administrative data from the UK, the paper finds that the choice of fixation length tracks the life-cycle decline of credit risk in the mortgage market: the loan-to-value (LTV) ratio decreases and collateral coverage improves over the life of the loan due to principal repayment and house price appreciation. High-LTV borrowers, who pay large initial credit spreads, trade off their insurance motive against reducing credit spreads over time using shorter-term contracts. To quantify demand for long-term contracts, I develop a life-cycle model of optimal mortgage fixation choice. With baseline house price growth and interest rate risk, households prefer shorter-term contracts at high LTV levels, and longer-term contracts once LTV is sufficiently low, in line with the data. The mechanism helps explain reduced and heterogeneous demand for long-term mortgage contracts. |
| Keywords: | Mortgage choice; house prices; credit risk; interest rate risk; household risk management; household finance. |
| JEL: | D15 E43 G21 G22 G50 G52 |
| Date: | 2023–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:1009&r=cta |
| By: | Seerattan, Dave |
| Keywords: | DEUDA EXTERNA, GESTION DE LA DEUDA, CONTRATOS, DESASTRES NATURALES, HURACANES, EXTERNAL DEBT, DEBT MANAGEMENT, CONTRACTS, NATURAL DISASTERS, HURRICANES |
| Date: | 2023–01–20 |
| URL: | http://d.repec.org/n?u=RePEc:ecr:col022:48714&r=cta |
| By: | Yuechen Dai; Richard Watt (University of Canterbury) |
| Abstract: | The problem of insurer insolvency has almost exclusively been seen as an issue in regulation. However, it is also clear that there is an obvious element of asymmetric information present when insolvency is possible. Insurers are clearly better informed of their probability of defaulting on an insurance arrangement than are their insureds, and just as clearly, that probability affects the value of the contract to the insured. With that in mind, we recast the issue of insurer insolvency within the context of asymmetric information, specifically, adverse selection. In our model, the (risk-neutral) insurer is the informed agent, and the (risk-averse) policyholder is the uninformed principal. Thereby, the classic player identities in an asymmetric information problem are reversed. We find equilibrium contract menus for the cases of perfect competition between insurers, and for the case of a single monopolistic insurer. |
| Keywords: | Insurance insolvency, asymmetric information, adverse selection |
| JEL: | D80 D82 |
| Date: | 2023–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:23/02&r=cta |
| By: | Victor Augias; Eduardo Perez-Richet |
| Abstract: | We study how to optimally design selection mechanisms, accounting for agents' investment incentives. A principal wishes to allocate a resource of homogeneous quality to a heterogeneous population of agents. The principal commits to a possibly random selection rule that depends on a one-dimensional characteristic of the agents she intrinsically values. Agents have a strict preference for being selected by the principal and may undertake a costly investment to improve their characteristic before it is revealed to the principal. We show that even if random selection rules foster agents' investments, especially at the top of the characteristic distribution, deterministic "pass-fail" selection rules are in fact optimal. |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2303.11805&r=cta |