Credit Bureau Policy and Sustainable Reputation Effects in Credit Markets

Abstract

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.Welfare-increasing reputation effects arise in credit markets when adverse selection gives rise to borrower reputation formation incentives that mitigate moral hazard problems. This paper shows that welfare stemming from reputation effects will diminish over time as the private information of borrowers is revealed to lenders in the form of lengthening credit histories. Aggregate borrower welfare may therefore decrease over time unless reputation effects can be sustained. Restricting a lender's access to a borrower's credit history via credit bureau policy is shown to be one method of sustaining reputation effects and preventing a decline in welfare.

Credit Information Sharing and Its Link to Financial Inclusion and Financial Intermediation

“…Sharing more than default information may reduce borrower's incentive to perform well. Similarly, Vercammen (1995) discusses the optimal length of time that information of a borrower's credit report should be kept in the records. He shows that excessively long credit histories may have negative welfare impacts.…”

The Role of Comprehensive Information Sharing in Credit Market: Theoretical Analysis and New Evidence from the European Union

“…Theoretical research: Pagano and Jappelli (1993); Padilla and Pagano (1997;2000); Vercammen (1995) Empirical research: Behr and Sonnekalb (2012); Dierkes et al (2013) Houston et al (2010); Jappelli and Pagano (2002) Information sharing produces the negative "composition effects", leaving the credit risk increase: Brown et al (2009);Jappelli and Pagano (2005); Dell'Ariccia and Marquez (2006) "information rents" once the lending relationship is established. This leads to the "hold-up" problem (borrowers will be charged high interest rate, which reduces their effort to perform and increases the default) as well as moral hazard.…”

“…Besides, views from Vercammen (1995) and Padilla and Pagano (2000) show that long-term positive credit record leaves an occasional default insignificant, as these "good" borrowers can still obtain credit from other banks. Thus, excessive positive information could reduce the "discipline effects" and increase the probability of default.…”

“…Theories at this stage suggested that information sharing is substantially relevant to overcome adverse selection and moral hazard arising from information asymmetry in credit market. This progress is mainly achieved through several aspects: (1) ameliorating the quality of the pool of borrowers to reduce adverse selection (Pagano & Jappelli, 1993); (2) depriving the bank's ability of extracting "information rents" to lower moral hazard (Padilla & Pagano, 1997); and (3) exerting "discipline constraint" on individual borrower to create incentives for repayments (Padilla & Pagano, 2000;Vercammen, 1995).…”

Signaling Creditworthiness in Peruvian Microfinance Markets: The Role of Information Sharing

“…Contributions by Padilla and Pagano (2000) and Vercammen (1995) suggest that sharing more detailed information on borrowers' characteristics and/or credit performance can reduce the disciplinary effects of credit bureaus in developed credit markets. They argue that, in an adverse selection setting, the effectiveness of default as a bad signal is reduced as banks exchange better information on their clients.…”