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Vertical Differentiation, Asymmetric Information and Endogenous Bank Screening

Author

Listed:
  • Hyytinen Ari

    () (The Research Institute of the Finnish Economy (ETLA))

  • Toivanen Otto

    () (Helsinki School of Economics)

Abstract

In a model of bank lending characterized by asymmetric information, we show that banks may use an interim monitoring technology strategically to soften price competition, even though the borrowers face no moral hazard problem. The interim monitoring technology can also be used to alleviate adverse selection. The equilibria that emerge resemble those in vertical product differentiation models. We also show that because of the strategic use of interim monitoring, a bank may forego the use of a costless and perfect ex-ante screening technology.

Suggested Citation

  • Hyytinen Ari & Toivanen Otto, 2004. "Vertical Differentiation, Asymmetric Information and Endogenous Bank Screening," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 4(1), pages 1-20, June.
  • Handle: RePEc:bpj:bejtec:v:topics.4:y:2004:i:1:n:5
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    References listed on IDEAS

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    1. George A. Akerlof, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, Oxford University Press, vol. 97(4), pages 543-569.
    2. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, pages 225-264.
    3. Sendhil Mullainathan & Marianne Bertrand, 2000. "Agents with and without Principals," American Economic Review, American Economic Association, pages 203-208.
    4. Ross, Stephen A, 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, American Economic Association, pages 134-139.
    5. Marianne Bertrand & Sendhil Mullainathan, 2000. "Do CEOs Set Their Own Pay? The Ones Without Principals Do," Working Papers 810, Princeton University, Department of Economics, Industrial Relations Section..
    6. Spence, Michael & Zeckhauser, Richard, 1971. "Insurance, Information, and Individual Action," American Economic Review, American Economic Association, pages 380-387.
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    Cited by:

    1. Hyytinen, Ari & Toivanen, Otto, 2004. "Monitoring and market power in credit markets," International Journal of Industrial Organization, Elsevier, pages 269-288.
    2. Hyytinen, Ari & Toivanen, Otto, 2002. "Misuse and Non-use of Information Acquisition Technologies in Banking," Discussion Papers 823, The Research Institute of the Finnish Economy.
    3. Hyytinen, Ari & Toivanen, Otto, 2004. "Monitoring and market power in credit markets," International Journal of Industrial Organization, Elsevier, pages 269-288.

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