Sharing Default Information as a Borrower Discipline Device
CSEF Working Paper No. 21
39 Pages Posted: 22 Mar 2000
Date Written: July 1999
Creditors often share information about their customers' credit record. Besides helping them to spot bad risks, this informational exchange acts as a disciplinary device. If creditors are known to exchange data about defaults, borrowers must consider that default on a current lender would disrupt their credit rating with all the other lenders. This raises their incentive to perform. But sharing more detailed information can reduce this disciplinary effect: when lenders only disclose past defaults, borrowers' incentives to perform may be greater than when lenders share all their information. In some instances, by "fine-tuning" the type and accuracy of the information shared, lenders can raise borrowers' incentives to their first-best level.
JEL Classification: E21, E62, H31
Suggested Citation: Suggested Citation