Information Acquisition in Competitive Markets
An Application to the US Mortgage Market
Published In: American Economic Journal: Microeconomics, v. 4, no. 4, Nov. 2012, p. 65-106
Posted on RAND.org on November 01, 2012
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 where firms search for information that may disqualify applicants. Contracts are incomplete because the amount of information acquired cannot be observed. Despite competition, we find that firms search for too much information in equilibrium. If price discrimination is prohibited, members of high-risk groups suffer disproportionately high rejection rates. If rejected applicants remain in the market, the resulting adverse selection can be severe. We apply the results to the US mortgage market.