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on Contract Theory and Applications |
| By: | Liu, Lu |
| Abstract: | Long-term fixed-rate mortgage contracts protect households against interest rate risk, yet most countries have relatively short interest rate fixation lengths. Using administrative data from the UK, the paper finds that the choice of fixation length tracks the life-cycle decline of credit risk in the mortgage market: the loan-to-value (LTV) ratio decreases and collateral coverage improves over the life of the loan due to principal repayment and house price apprecia-tion. High-LTV borrowers, who pay large initial credit spreads, trade off their insurance motive against reducing credit spreads over time using shorter-term contracts. To quantify demand for long-term contracts, I develop a life-cycle model of optimal mortgage fixation choice. With baseline house price growth and interest rate risk, households prefer shorter-term contracts at high LTV levels, and longer-term contracts once LTV is sufficiently low, in line with the data. The mechanism helps explain reduced and heterogeneous demand for long-term mortgage contracts. JEL Classification: D15, E43, G21, G22, G5, G52 |
| Keywords: | credit risk, household finance, household risk management, house prices, interest rate risk, mortgage choice |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:2023142&r=cta |
| By: | Philippe de Donder (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CNRS - Centre National de la Recherche Scientifique); Marie-Louise Leroux (Département des Sciences Economiques, ESG-UQAM, Montréal, Canada); François Salanié (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: | Advantageous selection occurs when the agents most eager to buy insurance are also the cheapest ones to insure. Hemenway (1990) links it to differences in risk-aversion among agents, implying different prevention efforts, and finally different riskinesses. We argue that it may also appear when agents share the same attitude towards risk, and in the absence of moral hazard. Using a standard asymmetric information setting satisfying a single-crossing property, we show that advantageous selection may occur when several contracts are offered, or when agents also face a non-insurable background risk, or when agents face two mutually exclusive risks that are bundled together. We illustrate this last effect in the context of life care annuities, a product bundling long-term care insurance and annuities, by constructing a numerical example based on Canadian survey data. |
| Keywords: | Propitious selection, Positive or negative correlation property, Contract bundling, Long-term care insurance, Annuity |
| Date: | 2023–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04120555&r=cta |
| By: | Tetsuya Shinkai (School of Economics, Kwansei Gakuin University); Naoshi Doi (Otaru University of Commerce- Economics) |
| Abstract: | This article examines menu-pricing and quality decisions of a platform monopolist for two types of sellers and buyers on a two-sided market. Under the GPD (general Pareto distribution) valuation of buyers for transaction services, we show that unique optimal services fees exist for sellers and buyers. The two types of services (premium and spot) are offered to both sellers and buyers. An optimal premium membership fee and the quality service level are considered for the premium type of buyers in a platform optimization problem. Assuming that the unit cost of the product is fixed, we show that the optimal membership fee/the level of quality service for premium-type buyers decreases/increases as the service cost for premium-type sellers increases. However, if delivery fees charged by transport companies for spot-type sellers increase, the optimal membership fee/level of quality service increases/decreases. However, if the demand for services of the platform for both types of buyers increases, both the optimal membership fee and quality level of services increase. |
| Keywords: | Platform monopoly; Menu-pricing; Quality decisions; Two-sided market. |
| JEL: | D21 D43 L13 L15 |
| Date: | 2023–06 |
| URL: | http://d.repec.org/n?u=RePEc:kgu:wpaper:252&r=cta |