Credit Information Sharing and Hold-up
48 Pages Posted: 22 Jun 2016 Last revised: 19 Jun 2017
Date Written: March 1, 2017
Abstract
I study hold-up in bank lending and the effects of information sharing on this adverse selection problem. I derive testable hypotheses by augmenting the model in Gehrig and Stenbacka (2007). For empirical identification, I exploit the introduction of an information sharing system in an African banking market for which banks started to report borrowers to the system more than a year before they began to actively use the data to screen applicants. Thereby, I combine a no-information sharing control situation with a loan-level data source that facilitates tracing borrowers who switch banks. Results lend great support to the idea that information sharing efficiently mitigates hold-up. Successful repeated borrowers can obtain cheaper follow-up loans when information is actively shared and borrowers who switch institutions profit most from the reduction in adverse selection. At the same time, as banks lose their ability to hold-up successful borrowers for their second loan, first-time credit starts to be slightly more expensive.
Keywords: Hold-up, Credit Information Sharing, Credit Registry, Interest Rates, Switching
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