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

Natalia Kovrijnykh () and Igor Livshits

No 340, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: 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 leads to bankruptcy. We apply the model to analyze effects of a government intervention in debt restructuring. We show that a mortgage modification program aimed at limiting foreclosures that fails to take into account private debt restructuring may have the opposite effect from the one intended.

Keywords: Default; Delinquency; Bankruptcy; Renegotiation; Adverse Selection; Screening; Consumer Credit. (search for similar items in EconPapers)
JEL-codes: D14 D82 D86 G18 G21 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2013
References: Add references at CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: SCREENING AS A UNIFIED THEORY OF DELINQUENCY, RENEGOTIATION, AND BANKRUPTCY (2017)
Working Paper: Screening as a Unified Theory of Delinquency, Renegotiation, and Bankruptcy (2015)
Working Paper: Screening as a Unified Theory of Delinquency, Renegotiation and Bankruptcy (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:340

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