We show that the availability of credit ratings (or other public information) increases the allocative efficiency of cash flows by reducing costly retention, but reduces lending standards and can lead to an oversupply of credit. These findings are in contrast to regulators' view of credit ratings as a "disciplining device." Moreover, improved screening does not solve the problem; as banks' screening technology becomes more precise,...

We study a bargaining model in which a buyer makes frequent offers to a privately informed seller, while gradually learning about the seller’s type from “news.” We show that the buyer’s ability to leverage this information to extract more surplus from the seller is remarkably limited. In fact, the buyer gains nothing from the ability to negotiate a better price despite the fact that a...

Due diligence is common practice prior to the execution of large transactions. We propose a model of due diligence and analyze its effect on prices, payoffs, and deal completion. In our model, if the seller accepts an offer, the acquirer has the right to gather information and chooses when to execute the transaction. In equilibrium, the acquirer engages in “too much” due diligence. Our quantitative...