Working Paper: CEPR ID: DP18288
Authors: Itai Agur; Anil Ari; Giovanni Dell'Ariccia
Abstract: Lenders can exploit households' payment data to infer their creditworthiness. When households value privacy, they then face a tradeoff between protecting such privacy and attaining better credit conditions. We study how introducing an informationally more intrusive digital payment vehicle affects households' cash use, credit access, and welfare. A tech monopolist controls the intrusiveness of the new payment method and manipulates information asymmetries among households and oligopolistic banks to extract data contracts that are more lucrative than lending on its own. The laissez-faire equilibrium entails a digital payment vehicle that is more intrusive than socially optimal, providing a rationale for regulation.
Keywords: Privacy; Financial Intermediation; BigTech; Data Regulation
JEL Codes: D82; E41; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Introduction of a more intrusive digital payment vehicle (E42) | Probability of revealing household creditworthiness (G51) |
| Probability of revealing household creditworthiness (G51) | Access to credit (G21) |
| Access to credit (G21) | Welfare outcomes (I38) |
| Introduction of a more intrusive digital payment vehicle (E42) | Access to credit (G21) |
| Introduction of a more intrusive digital payment vehicle (E42) | Welfare outcomes (I38) |
| Digital payment provider's strategy (D49) | Lemons market (L15) |
| Excessive intrusiveness (H13) | Not socially optimal outcome (D69) |