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Information-Based Pricing in Specialized Lending

Author

Listed:
  • Kristian Blickle
  • Zhiguo He
  • Jing Huang
  • Cecilia Parlatore

Abstract

We study specialized lending in a credit market competition model with private information. Two banks, equipped with similar data processing systems, possess “general” signals regarding the borrower’s quality. However, the specialized bank gains an additional advantage through further interactions with the borrower, allowing it to access “specialized” signals. In equilibrium, both lenders use general signals to screen loan applications, and the specialized lender prices the loan based on its specialized signal conditional on making a loan. This private-information-based pricing helps deliver the empirical regularity that loans made by specialized lenders have lower rates (i.e., lower winning bids) and better ex-post performance (i.e., lower non-performing loans). We show the robustness of our equilibrium characterization under a generalized information structure, endogenize the specialized lending through information acquisition, and discuss its various economic implications.

Suggested Citation

  • Kristian Blickle & Zhiguo He & Jing Huang & Cecilia Parlatore, 2024. "Information-Based Pricing in Specialized Lending," NBER Working Papers 32155, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32155
    Note: CF IO PR
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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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