Show Me Yours and I'll Show You Mine: Sharing Borrower Information in a Competitive Credit Market
58 Pages Posted: 22 May 2015 Last revised: 6 Mar 2016
Date Written: February 25, 2016
We exploit contract-level data on approved and rejected small-business loans to assess the impact of a new credit registry in Bosnia and Herzegovina. Our findings are threefold. First, mandatory information sharing tightens lending at the extensive margin as loan officers reject more applications. These rejections are based increasingly on hard information — especially registry information on applicants’ outstanding debt — and less on soft information. Second, lending standards also tighten at the intensive margin: information sharing leads to smaller, shorter and more expensive loans for first-time borrowers. Yet, in line with lower switching costs, repeat borrowers gain from information sharing. Third, the tightening of lending standards results in fewer defaults, in particular among first-time borrowers, and higher returns on loans. This suggests that a reduction in adverse selection is an important channel through which information sharing affects loan quality.
Keywords: Information sharing, credit market competition, hazard models
JEL Classification: D04, D82, G21, G28
Suggested Citation: Suggested Citation