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The Design of Credit Information Systems

Author

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  • Bhaskar, Venkataraman
  • Thomas, Caroline

Abstract

We examine the performance of large credit markets subject to borrower moral hazard, when information on the past behavior of borrowers is subject to bounded memory constraints. Borrowers who default should be temporarily excluded in order to efficiently incentivize repayment. However, lenders have an incentive to lend to borrowers who are near the end of their exclusion period, undermining this punishment. With perfect information on past behavior, no lending can be sustained, independent of the length of memory. Coarse information about borrowers' histories improves outcomes, by mitigating lender moral hazard. By pooling recent defaulters with those who defaulted further in the past, coarse information induces borrower adverse selection. This disciplines lenders, who are now unable to target loans towards those defaulters who are least likely to offend again. Paradoxically, efficiency can be improved by non-monotonic information structures that pool non-defaulters and multiple offenders. Equilibria where defaulters get a loan with positive probability can also improve efficiency, by raising the proportion of likely re-offenders in the pool of recent defaulters.

Suggested Citation

  • Bhaskar, Venkataraman & Thomas, Caroline, 2017. "The Design of Credit Information Systems," CEPR Discussion Papers 11849, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11849
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    Cited by:

    1. Sergei Kovbasyuk & Giancarlo Spagnolo, 2016. "Memory and Markets," EIEF Working Papers Series 1606, Einaudi Institute for Economics and Finance (EIEF), revised Oct 2017.

    More about this item

    Keywords

    credit markets; information design; one-sided moral hazard; repeated games with randomly matched players.;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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