Articles

Monopoly and Information Advantage in the Residential Mortgage Market

T. RIDDIOUGH

Review of Financial Studies

novembre 2008, vol. 21, n°6, pp.2677-2703

Départements : Finance

Mots clés : Credit, Competition


Information advantage and entry deterrence incentives are investigated as they affect lending outcomes and competitive structure of the U. S. residential mortgage market. In the model, when assessing a loan applicant, the incumbent monopoly lender employs a proprietary screening technology to produce a privately observed estimate of loan credit quality. When faced with potential competitive entry, the incumbent signals poor credit quality by charging high prices to higher-quality borrowers. Market structure and loan pricing strategy are derived endogenously, where the incumbent deters entry first by segmenting consumers into prime and sub-prime loan markets and second by charging prime market borrowers a uniform rate that is higher than the risk-based monopoly rate. Empirical implications of the model are identified, and evidence is presented that is consistent with predictions.


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