Competition and Strategic Information Acquisition in Credit Markets
36 Pages Posted: 4 Mar 2002
Date Written: March 2002
Regulatory changes and technological advances have profoundly affected the competitive landscape of credit markets. In this paper, we investigate how intermediaries alter their information acquisition strategies in response to increased competition. We specify a model where the severity of asymmetric information between banks and borrowers increases with their informational distance. As the number of active banks grows, investments in information acquisition initially fall with returns to informed intermediation. However, when a critical investment threshold is reached, further entry leads to specialization. Intermediaries optimally refocus informational resources in their core markets by retrenching from peripheral segments to fend off competitive threats to their captive customer base. The incentive to concentrate informational resources increases in the degree of adverse selection in the market.
Keywords: Banking, competition, information acquisition, specialization
JEL Classification: G21, L11, L14, D44
Suggested Citation: Suggested Citation