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RFS Advance Access published online on May 25, 2005
Review of Financial Studies, doi:10.1093/rfs/hhi024
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© The Author 2005. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oupjournals.org

Article

Information Acquisition under Uncertainty in Credit Markets

Priyodorshi Banerjee 1*
1 Department of Agricultural, Environmental and Development Economics, Ohio State University, 2120 Fyffe Road, Columbus, OH 43210

* To whom correspondence should be addressed.
Priyodorshi Banerjee, E-mail: banerjee.29{at}osu.edu


  Abstract

This paper 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 paper 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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