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Imperfect Competition and Costly Screening in the Credit Market under Conditions of Asymmetric Information

Discussion Papers

No.015

November 2004

ABSTRACT

This article provides an analysis of how banks determine levels of information production when they are in imperfect competition and there is a condition of information asymmetry between borrowers and banks. Specifically, the study concentrates on information production activities of banks in duopoly where they simultaneously determine intensity of pre-loan screening as well as interest rates. The preliminary model of this paper illustrates that due to strategic complementarities between banks, banking competition can result in inferior equilibrium out of multiple equilibria and insufficient information production. Policymakers must take into account the possible adverse effects of competition-enhancing policies on information production activities.

Keywords: Banking, Imperfect competition, Information production
JEL classification: D82, G21

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