Information Acquisition in Competitive Markets: An Application to the US Mortgage Market
41 Pages Posted: 5 Apr 2011 Last revised: 19 Mar 2015
Date Written: September 5, 2011
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: Suggested Citation