Screening as a Unified Theory of Delinquency, Renegotiation, and Bankruptcy

@inproceedings{Kovrijnykh2013ScreeningAA,
  title={Screening as a Unified Theory of Delinquency, Renegotiation, and Bankruptcy},
  author={Natalia Kovrijnykh and Igor Livshits},
  year={2013}
}
We propose a parsimonious 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 the absence of renegotiation, delinquency… CONTINUE READING
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