Competition and Strategic Information Acquisition in Credit Markets

Regulatory changes and technological advances have profoundly affected the competitive landscape of credit markets. In this paper, we investigate how intermediaries alter their infor-mation acquisition strategies in response to increased competition. We specify a model where the severity of asymmetric information between banks and borrowers increases with their infor-mational 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 in-formational resources in their core markets by retrenching from…