Data and Welfare in Credit Markets

We show how to measure the welfare effects arising from increased data availability. When lenders have more data on prospective borrower costs, they can charge prices that are more aligned with these costs. This increases total social welfare and transfers surplus from borrowers to lenders. We show that the magnitudes of the welfare changes can be estimated using only quantity data and variation in prices. We apply the methodology on bankruptcy flag removals and find that removing prior bankruptcy information substantially increases the social surplus of previously bankrupt consumers, at the cost of a modest decrease in total social welfare. This suggests that flag removals have low efficiency costs for redistributing surplus to previously bankrupt borrowers. We show how the framework can be extended to incorporate adverse selection and imperfect competition.