Information Acquisition and Market Power in Credit Markets

Investment in information acquisition can be used strategically by banks as a commitment device to augment market power. A static two-period economy with informationally heterogeneous banks is analyzed. Information acquisition limits asymmetries of information and competitors ’ rents ex post. If projects yield insufficient returns in the first period, competitors ’ ex ante break even constraints are tightened, and competition inhibited. Market power can thereby be substantially augmented, and monopoly rents obtained. Welfare is lower with information acquisition, while banks are better off. With more than two banks, information acquisition is characterized by strategic complementarities: hence, multiple equilibria may exist. This article is based on a chapter from my doctoral dissertation submitted to Boston University. I am grateful to Christophe Chamley, Jonathan Eaton, Simon Gilchrist, Hsueh-Ling Huynh, Albert Ma and espe-cially Dilip Mookherjee for their invaluable guidance. I also thank Thomas Chemmanur, Claudio Gonzalez-Vega, Debarshi Nandy, Philip Strahan and seminar participants at Boston and Ohio State Universities for many helpful comments. All errors are mine alone.