Market Transparency and Information Frictions

This paper examines how imperfect information, potential adverse selection, and endogenous information frictions shape credit market access and corporate debt issuance. Building upon the foundational framework of Gorton and Ordoñez (2014), we introduce a model where the cost of information production serves as a proxy for market transparency. We extend this setup by incorporating an endogenous friction parameter, σ, representing a cost deployed by borrowers to purposely obscure collateral quality, thereby raising lenders' information acquisition costs to ϕ = γ(1 + σ). While conventional literature frames information frictions and market opacity as negative economic externalities, we demonstrate that under specific institutional and parametric constraints, borrower-induced frictions can prevent premature information revelation and costly separating equilibria. Consequently, these frictions can expand the information-insensitive pooling region, facilitate broader credit access for viable production projects, and generate higher aggregate economic wealth. Finally, we map the complete set of model equilibria and characterize the precise conditions under which an increase in information frictions triggers a credit expansion rather than a credit crunch.