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Is more information always better? A case in credit markets

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  • Sharma, Priyanka

Abstract

This paper studies the impact of behavioral and non-behavioral information contained in consumer credit reports on the credit market. A repeated game of incomplete information between a borrower and a sequence of lenders is considered. Lenders’ beliefs regarding the borrower's type depend on the borrower's historical loan performance and other informative signals. It is established that for low beliefs, strategic defaults occur in equilibrium as the borrower defaults on his loans despite having the ability to repay them. Further, as the ancillary signals become increasingly informative of the borrower's type, the range of beliefs over which strategic defaults occur expands. This increase in strategic defaults highlights an unintended negative effect of allowing informative signals to influence beliefs. On the upside, the informative signals allow lenders to learn the borrower's type more quickly.

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  • Sharma, Priyanka, 2017. "Is more information always better? A case in credit markets," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 269-283.
    • Handle: RePEc:eee:jeborg:v:134:y:2017:i:c:p:269-283
    DOI: 10.1016/j.jebo.2016.12.002
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    2. Antonio Díaz & Francisco Jareño & Eliseo Navarro, 2022. "Yield curve data choice and potential moral hazard: An empirical exercise on pricing callable bonds," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 2124-2145, April.
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    4. Michael Adusei & Ngozi Adeleye, 2022. "Credit information sharing and non‐performing loans: The moderating role of creditor rights protection," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(4), pages 4756-4769, October.

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    More about this item

    Keywords

    Credit bureaus; Information; Signals; Repeated games;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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