Essays in Urban Economics
Open AccessThis dissertation consists of three essays on urban economics. The first two essays conduct a theoretical and empirical examination of interactions among borrowers, brokers, and lenders in the primary mortgage market of the United States. Chapter 1 presents a model which adds the possibility that brokers have a technology that allows borrowers to raise their apparent creditworthiness. This model is used to answer the question: Do modifications to compensation incentives of mortgage brokers affect the range of creditworthiness for mortgage applicants? Chapter 2 tests assumptions and predictions of this new model with credit enhancing technology on patterns of mortgage broker intermediation in the primary mortgage market. The third essay provides new results regarding congestion pricing to resolve problems raised by the Braess paradox.Chapter 1 models the application choice of potential borrowers who may choose to employ either a mortgage broker as an intermediary in the mortgage market or to use a direct lender for mortgage origination. The distinctive feature of mortgage brokers in this model is that they have access to a technology that can enhance creditworthiness on applications evaluated by mortgage lenders. Accordingly, applicants with lower creditworthiness can achieve a higher probability of origination when employing a mortgage broker. The structure in which mortgage brokers are compensated by lenders and borrowers affects the optimal amount of service provided by brokers to individual borrowers. The model predicts that the supply of mortgage credit to the marginal borrower is especially sensitive to variation in levels of broker service. The lower bound creditworthiness of marginal loan applicants who are served by brokers, the average creditworthiness of all applicants, and the probability of origination of applicants conditional on applying all vary with changes in the broker compensation structure. Chapter 2 tests the theoretical assumption that mortgage brokers have a technology that allows them to act as coaches for prospective borrowers and improve the observable creditworthiness of mortgage loan applicants prior to application submission. The chapter tests the hypothesis that brokered originations are associated with larger increases in pre-origination borrower credit scores when compared to direct lender originations. This coaching effect is strongest among borrowers who are self-assessed to have relatively less knowledge about the mortgage process, demonstrating a specialized role for brokers to increase mortgage credit access for uninformed mortgage applicants. Broker originations are related to higher loan pricing and, consistent with literature on commercial coaching in fields such as college test preparation, broker augmentations in observable creditworthiness are associated with higher short term delinquency for observationally equivalent borrowers. These results are consistent with the assumption in Chapter 1 that full service brokers employ a credit enhancement technology to serve marginal mortgage borrowers.Chapter 3 formally demonstrates that under inelastic demand, the application of an optimal toll on the congested links in a Braess network will decrease aggregate network time cost. To expand transportation engineering literature on the Braess paradox, the formal proof is extended to demonstrate that under elastic demand, optimal tolling increases social welfare in a Braess network. Finally, while transportation economists indicate that optimal tolling reduces network capacity requirements, this chapter shows that an optimally tolled congestible network may be larger than a second best untolled Braess network.
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