Working Paper: CEPR ID: DP579
Authors: Marco Pagano; Tullio Jappelli
Abstract: We present a model with adverse selection where information sharing between lenders arises endogenously. Lenders' incentives to share information about borrowers are positively related to the mobility and heterogeneity of borrowers, to the size of the credit market and to advances in information technology; on the other hand, such incentives are reduced by the fear of competition from potential entrants. In addition, information sharing increases the volume of lending when adverse selection is so severe that safe borrowers drop out of the market. These predictions are supported by international and historical evidence in the context of the consumer credit market. Information sharing is widespread in countries, such as Japan, the United Kingdom and the United States, where the geographical mobility of households is high and the consumer credit market is deep; while in countries with low mobility and thin consumer credit markets, e.g. Belgium and Italy, information sharing is minimal. The same predictions are also supported by US historical data.
Keywords: information sharing; asymmetric information; credit markets; mobility
JEL Codes: O82; G21; G29; N20; P52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| extent of information sharing (O36) | geographic mobility of borrowers (J62) |
| extent of information sharing (O36) | size of the consumer credit market (G21) |
| lenders pooling information (G21) | comprehensive coverage of information sharing (L86) |
| fear of competition (L13) | information sharing (O36) |
| technological innovations (O33) | information sharing (O36) |
| information sharing (O36) | volume of lending (G21) |
| mobility and heterogeneity of borrowers (G51) | lenders' incentives to share information (G21) |
| size of the credit market (E51) | lenders' incentives to share information (G21) |
| adverse selection (D82) | information sharing (O36) |
| information sharing (O36) | market efficiency (G14) |