Tim Seida: Adverse Selection Under Repeated Contracting in U.S. Mortgage Markets
Abstract: This paper studies how lender-borrower relationships impact performance, pricing, and competition in U.S. mortgage markets. I establish that lenders learn private information about borrowers during the lending relationship, creating adverse selection among borrowers who switch lenders. Switching borrowers are more likely to miss payments than borrowers who stay with their original lender, and lenders respond by charging switchers higher interest rates. To identify the role of lender private information in generating this adverse selection, I use lender market exits as a quasi-experiment and show that borrowers forced to switch lenders perform better than other borrowers who switch lenders. I then estimate a model of relationship lending with endogenous adverse selection to quantify how policies which eliminate incumbent lenders' information advantage would reduce their incentives to offer lower initial rates.
Maggie Hendrix
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