|Jan K. Brueckner is Chancellor's Professor of Economics at the University of California, Irvine. He received an A.B. from UC Berkeley in 1972 and a Ph.D. from Stanford University in 1976, and was a long-time faculty member at the University of Illinois at Urbana-Champaign before coming to UCI in 2005. Mr. Brueckner has published extensively in the areas of urban economics, public economics, housing finance, and the economics of the airline industry. He served as editor of the Journal of Urban Economics for 16 years and is currently a member of the editorial boards of 9 journals. He has served as a consultant to the World Bank, the US Department of Transportation, many of the major airlines, and other organizations.
|Much of the literature on the economics of mortgage markets has studied the FRM-ARM choice made by individual borrowers. However, to decide if the outcome of such a choice is efficient or approximately so, it is necessary to explore the question of optimal risk-sharing in mortgage contracts. But since only a small literature has studied this question, more research is clearly warranted. The present paper helps fill this gap by developing a simplified version of Arvan and Brueckner's (1986a) model, using it to characterize optimal contracts in the absence of mortgage termination, and then exploring how termination via prepayment or default affects optimal risk-sharing. The broad conclusion of the analysis is that potential mortgage termination makes higher risk exposure for borrowers optimal.|
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