Information Technology and Credit Markets
25 Pages Posted: 11 Jul 2001
Date Written: February 2001
This paper analyzes the impact of an information technology revolution on credit markets. We focus on two aspects of technological progress. On the one hand, better information technology may result in improved information processing; on the other, it might also lead to low cost or even free access to information through, for example, informational spillovers. In the context of credit screening, we show that an improved ability to process information increases interest rates and bank profits. However, better access to information decreases interest rates and the returns from screening. Hence, predictions regarding the pricing of financial claims hinge on the overall effect ascribed to the technological progress. Furthermore, we show that our results generalize to other financial markets where informational asymmetries are prime determinants of profitability, such as insurance and securities markets.
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