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Limited credit records and market outcomes

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  • Margherita Bottero

    ()
    (Bank of Italy)

  • Giancarlo Spagnolo

    ()
    (SITE – Stockholm School of Economics)

Abstract

Credit registers collect, store and share information regarding borrowers’ past and current credit relations. Interestingly, such data is typically erased from the public records after a number of years, in accordance with privacy protection laws, which aim at providing individuals with a fresh start from past events. In order to secure credit-worthy but unlucky borrowers with a new beginning, however, these provisions end up removing all of the public information, including that possibly still relevant for screening purposes. This paper assesses such trade-off, by studying the impact of limited records on borrowers’ behavior and market outcomes in a stylized credit market for unsecured loans. In this setup, limited records endogenously give rise to beneficial reputation effects in the form of higher equilibrium effort, which alleviate, rather than worsen, the distortions caused by asymmetric information. Further, we demonstrate that when moral hazard is high, 1-period records can achieve higher welfare and lead to a lower default rate than records that show all, or nothing, of the past history.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 903.

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Date of creation: Feb 2013
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Handle: RePEc:bdi:wptemi:td_903_13

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Keywords: privacy; data retention; credit registers; limited records;

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  1. Diamond, Douglas W, 1989. "Reputation Acquisition in Debt Markets," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 828-62, August.
  2. Jappelli, Tullio & Pagano, Marco, 1999. "Information Sharing, Lending and Defaults: Cross-Country Evidence," CEPR Discussion Papers 2184, C.E.P.R. Discussion Papers.
  3. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  4. James Vercammen, 2002. "Welfare-Improving Adverse Selection in Credit Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(4), pages 1017-1033, November.
  5. Ronel Elul & Piero Gottardi, 2008. "Bankruptcy: Is it enough to Forgive or must we also Forget?," CESifo Working Paper Series 2313, CESifo Group Munich.
  6. Martin W. Cripps & George J. Mailath & Larry Samuelson, 2004. "Imperfect Monitoring and Impermanent Reputations," Econometrica, Econometric Society, vol. 72(2), pages 407-432, 03.
  7. Mehmet Ekmekci, 2010. "Sustainable Reputations with Rating Systems," Discussion Papers 1505, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Curtis R. Taylor, 2004. "Consumer Privacy and the Market for Customer Information," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 631-650, Winter.
  9. Giovanni Sartor, 2006. "Privacy, Reputation, and Trust: Some Implications for Data Protection," EUI-LAW Working Papers 4, European University Institute (EUI), Department of Law.
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