Information Sharing in Credit Markets: Incentives for Incorrect Information Reporting

25 Pages Posted: 13 Sep 2006

See all articles by Maria Semenova

Maria Semenova

National Research University Higher School of Economics

Date Written: January 2006

Abstract

The introduction of institutions of credit information sharing - private credit bureaus and public credit registries - in the market for bank loans represent one of the possible solutions of information asymmetry problem, - the problem which the creditors tend to face. However the possibility of information sharing influences the bank's incentives in two different ways. While it disciplines the borrowers and, therefore, reduces the share of bad loans, a bank loses the competitive advantage, namely the monopolistic knowledge about the data in its clients' credit histories. Does the bank have an opportunity at its disposal to use the benefits of information sharing without losing its competitive advantage and its clientele? One way to do so is to report false data on borrowers. This paper analyses the bank's incentives for such opportunistic behavior and describes the impact of false information reporting on the characteristics of market equilibrium. The opportunity to get extra profit and to offer less expensive credit to new clients explains why banks prefer the strategy of dishonest behavior. This paper outlines the role of the informational intermediary in quality control for the data, contained in credit reports. Also, it describes the conditions under which verification of a certain share of reports provides that the parameters characterizing the equilibrium are equal to those in no information asymmetry situation.

Keywords: misreporting, credit bureau, pubic credit registry, information asymmetry

JEL Classification: G14, G21

Suggested Citation

Semenova, Maria, Information Sharing in Credit Markets: Incentives for Incorrect Information Reporting (January 2006). Available at SSRN: https://ssrn.com/abstract=929697 or http://dx.doi.org/10.2139/ssrn.929697

Maria Semenova (Contact Author)

National Research University Higher School of Economics ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

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