Roger Sparks

Putting the Squeeze on a Market for Lemons: Government- Sponsored Mortgage Securitization

Lenders either sell or obtain insurance for many of the mortgages they originate to reduce credit risk and enhance liquidity. An overwhelming majority of the mortgages sold are purchased by government-sponsored enterprises. The prevailing view is that government-sponsorship of mortgage securitization causes mortgage rates to be lower than they would otherwise be. Using a model that incorporates asymmetric information and adverse selection, we provide an example in which government-sponsored mortgage securitization raises the mortgage rate.

Automated Underwriting and the Profitability of Mortgage Securitization

This paper develops a game-theoretic model of mortgage securitization, which is then used to examine a potential effect of automated underwriting. The papers primary supposition is that automated underwriting lowers the costs to competitive mortgage originators and a monopolist securitizer of identifying mortgage applicants who are good credit risks. Faced with lower underwriting costs, originators will screen a larger number of mortgage applicants in the hopes of holding more good risks in their portfolios and passing through more bad risks to the securitizer. This mounting adverse-selection problem causes the securitizers expected revenues to decline; this effect can outweigh the cost-saving benefit of automated underwriting, causing the securitizers return on equity to fall. Copyright American Real Estate and Urban Economics Association.

Real wages, productivity, and the cycle: An efficiency wage model

Abstract This paper extends the results of previous work that shows imperfect monitoring of worker effort can explain involuntary unemployment in equilibrium. The present paper assumes that the performance standard for worker effort is determined endogenously and that worker utility is quasi-linear in the wage and effort. In this setting, involuntary unemployment still arises in equilibrium, but the comparative static properties of equilibrium are fundamentally altered. First, aggregate productivity shocks directly affect the real wage and work effort. The model can thus explain pro-cyclical variations in real wages and labor productivity. Also, work effort increases with the level of unemployment income.

An implicit contract approach to employee stock ownership plans

Abstract This paper analyzes employee stock ownership plans in an implicit contract model under asymmetric information. Our model assumes that worker compensation schemes involve wage and stock payments, or wage-share contracts, and treats shares of stock as an enforceable claim on the firms realized profits. In this setting, we show conditions under which wage-share contracts lead to first-best outcomes. We also demonstrate that optimal wage-share contracts achieve production-efficient levels of employment in all states of nature, even when a first-best solution is not attainable. A special case of our model implies that employee stock offerings are inversely correlated with profits.