Adverse selection,loan access and default behavior in the Chilean consumer debt market

Why do households use different types of loans?Which factors cause borrowers to default?Using a comprehensive survey dataset from Chile,I estimate a partial information model of consumer debt access,lender choice,loan amount and default.The model consists of a first-stage multinomial logit that explains the choice across the five loan types,plus the options of no access to debt due to credit constraints and a no wish for consumer debt.In the second and third stages,the model assumes a log-linear regression of the debt amount and a logit regression of the default behavior,accounting for the loan type selection probability.Identification is obtained using factors measured at different time periods for the default and the loan type choices.I find that households choose different lenders based on income,education and labor risks.Higher income and education decrease the probability of credit constraints,while increasing bank lending and debt amounts.Unemployment risk and household size increase the chances of all the loan types;however,unemployment decreases the debt amount.Age and wage volatility reduce the probability of all loans.Default decreases with income,education and age,whereas it increases with indebtedness,unemployment,household size,health shocks,and paying previous loans.Counterfactual exercises demonstrate that pension reform,higher requirements for borrowers’capacities,and financial literacy programs could substantially reduce default risk.Financial literacy could greatly reduce arrears,households with credit constraints,the number of debtors and the aggregate debt amounts,especially for non-bank lending.Highlights Chilean borrowers present heterogeneous adverse selection across lender types.No Debt Access decreases with income,age,education,but it increases with risk.Default is associated with income,unemployment,indebtedness and demographics.Paying past loans and health needs are associated with indebtedness and default.Financial literacy programs may be a powerful policy to improve the debt market.

A test on adverse selection of farmers in crop insurance:Results from Inner Mongolia,China

Adverse selection is an operating risk of crop insurance. Based on survey data on crop insurance collected by questionnaires in Inner Mongolia, China, the paper uses non-parametric analysis and econometric models to estimate the relationship between conditions for crop production and farmers＇ insurance decision in order to test the existence of farmers＇ adverse selection. The results show farmers＇ adverse selection does exist, but settling a claim by negotiation and premium subsidy from governments at all levels can defuse farmers＇ adverse selection under the current system of crop insurance. Risk regionalization, heterogeneous insurance contract and product innovation may decrease adverse selection to some extent.

A Study on‘the Market for Lemons’and the Strategy of‘Unification’in Booking Systems:A Case Study on the FAHSYSU Simulation T System of the Training Center for Clinical Skills of the First Affiliated Hospital of Sun Yat-sen University

Based on the blueprint of the training center for clinical skills of our hospital,this paper discusses the effect of‘the market for lemons’in its booking system from the perspective of economics of information,uses the law of large numbers and the central limit theorem to model to carry out the case study of FAHSYSU Simulation T,and takes measures of offsetting adverse selections to increase booking efficiency.The paper also analyzes how to apply the ancient Chinese theory that man is an integral part of nature to wipe out‘the market for lemons’.

An MA-MRR model for transaction-level analysis of highfrequency trading processes

The transaction-level analysis of security price changes by Madhavan,Richardson,and Roomans(1997,hereafter MRR)is a useful framework for financial analysis.The first-order Markov property of trading indicator variables is a critical assumption in the MRR model,which contradicts the information lag empirically demonstrated in high-frequency trading processes.In this study,a nonparametric test is employed,which shows that the Markov property of the trading indicator variables is rejected on most trading days.Based on the spread decomposed structure,an MA-MRR model was proposed with a moving average structure adopted to absorb the information lag as an extension.The empirical results show that the information lag plays an important role in measuring the adverse selection risk parameter and that the difference in this parameter between the original and the extension is significant.Furthermore,our analysis suggests that the information lag parameter is a useful measure of the average speed at which information is incorporated into prices.

Complimentary return-freight insurance serves the dark side: An innovative online return policy in China

E-commerce is a typical form of retail digitalization that introduces online uncertainty and product returns.To decrease the negative influence of online uncertainty,the largest Chinese e-commerce company,the Alibaba Group,invited an insurance company to develop return-freight insurance(RFI),a new kind of insurance,to compensate for consumers'losses in the event of online product returns.Complimentary RFl can increase consumer confidence in the retailer and attract more demand.Retailers who offer complimentary RFI demonstrate to consumers that their products and services are too good to incur excessive product returns.However,some low-quality online retailers can mimic competitors'behavior by offering complimentary RFI to consumers.This study aims to introduce an innovative online return policy based on RFI and to explore whether lowquality online retailers would use complimentary RFI as their return strategy to mislead consumers.Using signaling theory,we built a conceptual economic model that includes three exogenous pricing variables:RF,insurance premium,and compensation.These variables play different roles in the model because consumers cannot observe the insurance premium,but the compensation can be.The main finding of this study is that innovative complimentary RFI could be abused by low-type retailers when the premium and compensation are appropriate.Interestingly,compensation plays different roles for retailers with different product values:low-type retailers use complimentary RFI as a noise tool.When the product works for the consumer and the insurance profit is not too high,the compensation for the low-quality product should be larger than that for the highquality product,which is different from conventional wisdom.Although high-type online retailers may use complimentary RFl as a product quality signal,there is still a significant risk that nefarious elements will use it to create product quality noise.

A contract theory analysis to fiscal relations between the central and local governments in China

We use a contract theory/mechanism design framework to analyse the fiscal relations and reforms between the central and local governments in China,which are said to have made great contributions to economic growth since the‘economic reform’.First,we present the mechanism(a fiscal incentive contract model),which has created incentives for the development agent(local government),and clarify theoretically how the concept of bao(contract)works.We then comprehend the concept of bisai(contest)within the framework of the yardstick competition between local governments,and review the mechanism which encourages proper information revelation through intergovernmental comparison and competition.Lastly,we make a theoretical comparative analysis on the fiscal system reform(from the fiscal contracting system to the tax sharing system),from the perspective of how much room was left for the‘ratchet effect’in the dynamic relation between the central and local governments,and how it was solved(or mitigated)in the two fiscal systems.

The Role of Social Media in Providing Crisis Information in China:A Critical Evaluation of the Tianjin Fire Incident

This paper focusses on the information asymmetry in crisis news after a serious incident in Tianjin, China, in 2015. The incident caused enormous damage and resulted in societal unrest because of the lack of reliable information from the formal media channels. Social media — micro blogs —played a major role in reporting on crisis situations. We divided netizens(i.e., the citizens of the net)into high and low types according to their information-critical level to the crisis news. The data shows information deterioration on the crisis news, related to the netizens’ information-critical level. For the traditional media there is the opportunity to use information quality distortion to make more marginal profits. This is possible only if the citizens’ information stays under a certain quality level. The result is overprovision of low quality news and high quality news driven out of the market, whereupon adverse selection(i.e., a lack of symmetric information) appears. However, by adopting a process view, we found self-correcting mechanism(i.e., dying out of rumors) of the social media communities in China.We provided a agent-base model and simulation to show that the more media exist in the market, the faster speed of the information deterioration, but also the capacity to ‘discuss’ rumors.