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Information Sharing in Credit Markets: Incentives for Incorrect Information Reporting

  • Maria Semenova

    ()

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

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

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Article provided by Palgrave Macmillan in its journal Comparative Economic Studies.

Volume (Year): 50 (2008)
Issue (Month): 3 (September)
Pages: 381-415

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Handle: RePEc:pal:compes:v:50:y:2008:i:3:p:381-415
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  1. Margaret J. Miller (ed.), 2003. "Credit Reporting Systems and the International Economy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262134225, June.
  2. A. Jorge Padilla & Marco Pagano, 1999. "Sharing Default Information as a Borrower Discipline Device," CSEF Working Papers 21, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  3. Padilla, Atilano Jorge & Pagano, Marco, 1996. "Endogenous Communication Among Lenders and Entrepreneurial Incentives," CEPR Discussion Papers 1295, C.E.P.R. Discussion Papers.
  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. 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 461-78, November.
  6. 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.
  7. Pagano, Marco & Jappelli, Tullio, 1993. " Information Sharing in Credit Markets," Journal of Finance, American Finance Association, vol. 48(5), pages 1693-1718, December.
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