Information and Default in Consumer Credit Markets: Evidence from a Natural Experiment

Abstract

Despite the prominent role that information plays in the economic theory of credit markets, no direct evidence exists on the causal relationship between the availability of information about loan applicants and loan performance. This paper provides such evidence by exploiting an unanticipated change in the amount of information visible in an online market for loans and measures the impact of lender information on loan outcomes. Conditional on data available in both periods, allowing lenders to access more borrower credit information reduced default rates by 10 percentage points on average; these gains were most pronounced for high risk loans. Recovery rates on defaulted loans improved. Immediate lender returns increased by about 12 percentage points and took 6 weeks to decay, providing a measure of the time it took for the market to assimilate the content of the new information. I test whether these results are driven by lender screening or selection among loan applicants using data that is unobserved by lenders in both periods. I find that there is no change in unobserved credit quality among loan applicants, indicating that the improvement in default rates is primarily a result of better lender screening.

Keywords: consumer credit, information, default

JEL Classification: D53, G15, D82