Robert Phillips awarded FDIC grant
Professor Robert Phillips has been awarded a grant by the Federal Deposit Insurance Corporation (FDIC) Center for Financial Research to study price-driven adverse selection in consumer lending. Price-driven adverse selection refers to the phenomenon that, everything else being equal, default rates on loans will increase as the rate charged by a lending institution increases and will decrease as the rate charged decreases. The underlying reason for price-driven adverse selection is generally believed to be that potential borrowers possess “private information” about their probability of default that is not observable to the lender and that those with higher probability of default are less sensitive to the rate charged for the loan. The phenomenon is widely recognized by lenders but no consistent model has been developed for measuring it. In this research, Professor Phillips will develop models of price-driven adverse selection and test them using lending data from institutions in the US, Canada, and the UK. A better understanding of this phenomenon should both help lenders develop better pricing and underwriting policies and should help regulators better understanding the risks underlying consumer loan portfolios.
The DRO Division extends its congratulations to Professor Phillips on this accomplishment.