Whether or not banks are engaged in ex ante monitoring of customers may have important consequences for the whole economy.We approach this question via a model in which banks can invest in either information acquisition or market power (product differentiation). The two alternatives generate...

We study a financial market adverse selection model where all agents are endowed with initial wealth and choose to invest as entrepreneurs or financiers, or not to invest.We show that often a lack of outside finance leads to the emergence of financial markets where availability of outside...