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Information Sharing in Credit Markets: Incentives for Incorrect Information Reporting

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  • Maria Semenova

    () (Laboratory for Institutional Analysis of Economic Reforms, State University - Higher School of Economics, Pokrovsky Boulevard, 11, Office 814, Moscow 109028, Russia.)

Abstract

The introduction of institutions of credit information sharing – private credit bureaus and public credit registries – in the market for bank loans represents a possible solution of the information asymmetry problem which most creditors face. However, the possibility of information sharing influences the bank's incentives in two different ways. While it disciplines the borrowers, and therefore reduces the share of bad loans, a bank loses a competitive advantage, the monopolistic knowledge about the data in its clients' credit histories. Does the bank have an opportunity to use the benefits of information sharing without losing its competitive advantage and its clientele? One way to do so is to report false data on borrowers. In this paper, we analyse the bank's incentives to misreport given the bank cannot refuse to participate in the information sharing system, as membership is obligatory. Our main result is that the opportunity to get extra profit and to offer less-expensive credit to new clients explain why banks may prefer a strategy of dishonest behaviour. Comparative Economic Studies (2008) 50, 381–415. doi:10.1057/ces.2008.10

Suggested Citation

  • Maria Semenova, 2008. "Information Sharing in Credit Markets: Incentives for Incorrect Information Reporting," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 50(3), pages 381-415, September.
  • Handle: RePEc:pal:compes:v:50:y:2008:i:3:p:381-415
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    References listed on IDEAS

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    1. Pagano, Marco & Jappelli, Tullio, 1993. " Information Sharing in Credit Markets," Journal of Finance, American Finance Association, vol. 48(5), pages 1693-1718, December.
    2. Tullio Jappelli & Marco Pagano, 2000. "Information Sharing in Credit Markets: A Survey," CSEF Working Papers 36, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    3. Vercammen, James A, 1995. "Credit Bureau Policy and Sustainable Reputation Effects in Credit Markets," Economica, London School of Economics and Political Science, vol. 62(248), pages 461-478, November.
    4. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    5. Margaret J. Miller (ed.), 2003. "Credit Reporting Systems and the International Economy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262134225, January.
    6. Padilla, A. Jorge & Pagano, Marco, 2000. "Sharing default information as a borrower discipline device," European Economic Review, Elsevier, vol. 44(10), pages 1951-1980, December.
    7. Padilla, A Jorge & Pagano, Marco, 1997. "Endogenous Communication among Lenders and Entrepreneurial Incentives," Review of Financial Studies, Society for Financial Studies, vol. 10(1), pages 205-236.
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    Cited by:

    1. Cihak, Martin & Demirguc-Kunt, Asli, 2013. "Rethinking the state's role in finance," Policy Research Working Paper Series 6400, The World Bank.
    2. Laptieva, Nataliia, 2016. "Information sharing and the volume of private credit in transition: Evidence from Ukrainian bank-level panel dataAuthor-Name: Grajzl, Peter," Journal of Comparative Economics, Elsevier, vol. 44(2), pages 434-449.
    3. Doblas-Madrid, Antonio & Minetti, Raoul, 2013. "Sharing information in the credit market: Contract-level evidence from U.S. firms," Journal of Financial Economics, Elsevier, vol. 109(1), pages 198-223.
    4. World Bank, 2011. "General Principles for Credit Reporting," World Bank Other Operational Studies 12792, The World Bank.
    5. Nabi, Mahmoud Sami & Ben Souissi, Souraya, 2011. "Could dishonest banks be disciplined ?," MPRA Paper 32010, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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