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RFS Advance Access originally published online on May 25, 2005
Review of Financial Studies 2005 18(3):1075-1104; doi:10.1093/rfs/hhi024
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Right arrow D83 - Search; Learning; Information and Knowledge; Communication; Belief
Right arrow G14 - Information and Market Efficiency; Event Studies
Right arrow G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
Right arrow O33 - Technological Change: Choices and Consequences; Diffusion Processes
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© The Author 2005. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oupjournals.org

Information Acquisition Under Uncertainty in Credit Markets

Priyodorshi Banerjee
Ohio State University

Address correspondence to: Priyodorshi Banerjee, Department of Agricultural, Environmental and Development Economics, Ohio State University, 2120 Fyffe Road, Columbus, OH 43210, or email: banerjee.29{at}osu.edu.

This article studies information acquisition through investment in improved risk assessment technology in competitive credit markets. A technology has two attributes: its ability to screen in productive borrowers, and its ability to screen out unproductive borrowers. The two attributes have fundamentally different effects on acquisition incentives and the structure of equilibrium informational externalities between lenders. The article also studies how uncertainty associated with the quality of superior technology affects information acquisition incentives. Uncertainty influences information acquisition even with risk-neutral banks. Increased uncertainty may raise or dampen incentives, depending on whether uncertainty is, respectively, about screening out or screening in quality.


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