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Working Paper
Screening and adverse selection in frictional markets
Lester, Benjamin; Venkateswaran, Venky; Shourideh, Ali; Zetlin-Jones, Ariel (2016-03-10)
We incorporate a search-theoretic model of imperfect competition into an otherwise standard model of asymmetric information with unrestricted contracts. We develop a methodology that allows for a sharp analytical characterization of the unique equilibrium and then use this characterization to explore the interaction between adverse selection, screening, and imperfect competition. On the positive side, we show how the structure of equilibrium contracts?and, hence, the relationship between an agent?s type, the quantity he trades, and the corresponding price?is jointly determined by the severity ...
Working Papers , Paper 16-10

Working Paper
Securities Financing and Asset Markets: New Evidence
Breach , Tomas; King, Thomas B. (2018-11-27)
This paper presents new evidence on bilateral securities financing based on the Federal Reserve's Senior Credit Officer Opinion Survey, which was launched in the wake of the financial crisis to provide a window into this otherwise opaque market. The survey asks large broker-dealers about terms at which they fund client positions, and the demand for such funding, across several different collateral types. Within asset classes, reported changes in spreads, haircuts, and other financing terms move closely together, and we show that they also covary with the state of the underlying cash ...
Working Paper Series , Paper WP-2018-22

Working Paper
Reforming the US Long-Term Care Insurance Market
Braun, R. Anton; Kopecky, Karen A. (2024-08-14)
Nursing home risk is significant and costly. Yet, most Americans pay for long-term care (LTC) expenses out-of-pocket. This chapter examines reforms to both public and private LTCI provision using a structural model of the US LTCI market. Three policies are considered: universal public LTCI, no public LTCI coverage, and a policy that exempts asset holdings from the public insurance asset test on a dollar-for-dollar basis with private LTCI coverage. We find that this third reform enhances social welfare and creates a vibrant private LTCI market while preserving the safety net provided by public ...
Working Papers , Paper 24-17

Working Paper
Navigating Higher Education Insurance: An Experimental Study on Demand and Adverse Selection
Balakrishnan, Sidhya; Bettinger, Eric; Kofoed, Michael S.; Ritter, Dubravka; Webber, Douglas A.; Aksu, Ege; Hartley, Jonathan S. (2024-04-19)
We conduct a survey-based experiment with 2,776 students at a non-profit university to analyze income insurance demand in education financing. We offered students a hypothetical choice: either a federal loan with income-driven repayment or an income-share agreement (ISA), with randomized framingof downside protections. Emphasizing income insurance increased ISA uptake by 43%. We observe that students are responsive to changes in contract terms and possible student loan cancellation, which is evidence of preference adjustment or adverse selection. Our results indicate that framing specific ...
Finance and Economics Discussion Series , Paper 2024-024

Working Paper
Screening and Adverse Selection in Frictional Markets
Lester, Benjamin; Venkateswaran, Venky; Shourideh, Ali; Zetlin-Jones, Ariel (2017-10-10)
We incorporate a search-theoretic model of imperfect competition into a standard model of asymmetric information with unrestricted contracts. We characterize the unique equilibrium, and use our characterization to explore the interaction between adverse selection, screening, and imperfect competition. We show that the relationship between an agent?s type, the quantity he trades, and the price he pays is jointly determined by the severity of adverse selection and the concentration of market power. Therefore, quantifying the effects of adverse selection requires controlling for market ...
Working Papers , Paper 17-35

Working Paper
Market-making with Search and Information Frictions
Venkateswaran, Venky; Shourideh, Ali; Zetlin-Jones, Ariel; Lester, Benjamin (2018-07-19)
We develop a dynamic model of trading through market-makers that incorporates two canonical sources of illiquidity: trading (or search) frictions, which imply that market-makers have some amount of market power; and information frictions, which imply that market-makers face some degree of adverse selection. We use this model to study the effects of various technological innovations and regulatory initiatives that have reduced trading frictions in over-the-counter markets. Our main result is that reducing trading frictions can lead to less liquidity, as measured by bid-ask spreads. The key ...
Working Papers , Paper 18-20

Working Paper
Finance and Inequality : The Distributional Impacts of Bank Credit Rationing
Choudhary, M. Ali; Jain, Anil K. (2017-08-31)
We analyze reductions in bank credit using a natural experiment where unprecedented flooding differentially affected banks that were more exposed to flooded regions in Pakistan. Using a unique dataset that covers the universe of consumer loans in Pakistan and this exogenous shock to bank funding, we find two key results. First, banks disproportionately reduce credit to new and less-educated borrowers, following an increase in their funding costs. Second, the credit reduction is not compensated by relatively more lending by less-affected banks. The empirical evidence suggests that adverse ...
International Finance Discussion Papers , Paper 1211

Working Paper
Screening on Loan Terms: Evidence from Maturity Choice in Consumer Credit
Liberman, Andres; Paravisini, Daniel; Hertzberg, Andrew (2018-01-31)
We exploit a natural experiment in the largest online consumer lending platform to provide the first evidence that loan terms, in particular maturity choice, can be used to screen borrowers based on their private information. We compare two groups of observationally equivalent borrowers who took identical unsecured 36-month loans; for only one of the groups, a 60-month loan was also available. When a long-maturity option is available, fewer borrowers take the short-term loan, and those who do default less. Additional findings suggest borrowers self-select on private information about their ...
Working Papers , Paper 18-5

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