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 the role of information acquisition as a strategic tool for intermediaries to respond to competitive pressures. We specify a model in which the severity of asymmetric information between banks and borrowers varies with distance. Banks acquire borrower-specific information to both soften lending competition and to extend their market share by creating adverse-selection problems for their competitors. As the number of active banks grows, investments in information acquisition fall, leading not only to lower interest rates, but also to less efficient lending decisions. We also study the implications for industry consolidation, and show that merger waves in credit markets arise endogenously as a pure consequence of this strategic role for information.