Information-Based Pricing in Specialized Lending
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 borrowers quality; the specialized bank, has access to an additional specialized signal. We study equilibria in which both lenders use general signals to screen loan applications. Conditional on making an offer, the specialized lender prices loans based on its specialized signal. This private-information-based pricing helps explain why loans made by specialized lenders have lower interest rates (lower winning bids) and better ex-post performance (fewer non-performing loans), which we support with robust empirical evidence.
More from NBER
In addition to working papers, the NBER disseminates affiliates’ latest findings through a range of free periodicals — the NBER Reporter, the NBER Digest, the Bulletin on Retirement and Disability, the Bulletin on Health, and the Bulletin on Entrepreneurship — as well as online conference reports, video lectures, and interviews.
