Information Acquisition, Specialization and Credit Market Competition

Abstract:     
The paper explores the strategic effects of creditworthiness tests in a banking duopoly. It is shown that, depending on the expected quality of the borrower, information acquisition can be a strategic substitute or a strategic complement. In equilibrium banks will acquire information of symmetric quality if they cannot observe the competitors's screening effort. However, if each bank observes its competitor's investment in information acquisition asymmetric equilibria arise, where one bank specializes in information acquisition. Welfare and the firm's profit are higher in the symmetric case.

Key Words: Bank Competition, Relationship Banking, Screening, Auction Theory

Number of Pages in PDF File: 39

JEL Classification: G21, D44

working papers series