Information Acquisition in Competitive Markets: An Application to the US Mortgage Market

41 Pages Posted: 5 Apr 2011 Last revised: 19 Mar 2015

See all articles by Jeremy Burke

Jeremy Burke

Center for Economic and Social Research (CESR)

Curtis R. Taylor

Duke University - Department of Economics

Liad Wagman

Illinois Institute of Technology - Stuart School of Business, IIT

Date Written: September 5, 2011

Abstract

How do price commitments impact the amount of information firms acquire about potential customers? We examine this question in the context of a competitive market. Contracts are incomplete because the amount of information firms acquire about applicants during the screening process cannot be observed. Despite competition, we find that firms search for too much information in equilibrium. If price discrimination is prohibited, then members of high-risk groups suffer disproportionately high rejection rates. If rejected applicants remain in the market, then the resulting adverse selection can be so severe that all parties would be better off if no information were collected. We apply the results to the increasingly competitive US market for mortgages.

Keywords: Information Acquisition, Underwriting, Mortgages, Incomplete Contracts

JEL Classification: C73, D61, D83, L14

Suggested Citation

Burke, Jeremy and Taylor, Curtis R. and Wagman, Liad, Information Acquisition in Competitive Markets: An Application to the US Mortgage Market (September 5, 2011). Available at SSRN: https://ssrn.com/abstract=1803322 or http://dx.doi.org/10.2139/ssrn.1803322

Jeremy Burke (Contact Author)

Center for Economic and Social Research (CESR) ( email )

635 Downey Way
Los Angeles, CA 90089-3332
United States

Curtis R. Taylor

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States
919-660-1827 (Phone)
919-684-8974 (Fax)

Liad Wagman

Illinois Institute of Technology - Stuart School of Business, IIT ( email )

565 W Adams St Suite 452
Chicago, IL 60661
United States
7739809883 (Phone)

HOME PAGE: http://lwagman.org

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