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)
"Information Acquisition in Competitive Markets: An Application to the US Mortgage Market."
American Economic Journal: Microeconomics,
Asymmetric and Private Information; Mechanism Design
Search; Learning; Information and Knowledge; Communication; Belief
Economics of Contract: Theory
Banks; Depository Institutions; Micro Finance Institutions; Mortgages