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American Economic Journal: Microeconomics: Vol. 4 No. 4 (November 2012)

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Information Acquisition in Competitive Markets: An Application to the US Mortgage Market

Article Citation

Burke, Jeremy M., Curtis R. Taylor, and Liad Wagman. 2012. "Information Acquisition in Competitive Markets: An Application to the US Mortgage Market." American Economic Journal: Microeconomics, 4(4): 65-106.

DOI: 10.1257/mic.4.4.65

Abstract

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. (JEL D82, D83, D86, G21)

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Authors

Burke, Jeremy M. (RAND Corporation, Arlington, VA)
Taylor, Curtis R. (Duke U)
Wagman, Liad (IL Institute of Technology)

JEL Classifications

D82: Asymmetric and Private Information; Mechanism Design
D83: Search; Learning; Information and Knowledge; Communication; Belief
D86: Economics of Contract: Theory
G21: Banks; Depository Institutions; Micro Finance Institutions; Mortgages

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American Economic Journal: Microeconomics


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