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Vertical Differentiation, Asymmetric Information and Endogenous Bank Screening

Author

Listed:
  • Hyytinen Ari

    (The Research Institute of the Finnish Economy (ETLA), ari.hyytinen@econ.jyu.fi)

  • Toivanen Otto

    (Helsinki School of Economics, toivanen@hkkk.fi)

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
    DOI: 10.2202/1534-598X.1041
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    Cited by:

    1. 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.
    2. Hyytinen, Ari & Toivanen, Otto, 2004. "Monitoring and market power in credit markets," International Journal of Industrial Organization, Elsevier, vol. 22(2), pages 269-288, February.

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