Is more information always better? A case in credit markets

Priyanka Sharma

Journal of Economic Behavior & Organization, 2017, vol. 134, issue C, 269-283

Abstract: This paper studies the impact of behavioral and non-behavioral information contained in consumer credit reports on the credit market. A repeated game of incomplete information between a borrower and a sequence of lenders is considered. Lenders’ beliefs regarding the borrower's type depend on the borrower's historical loan performance and other informative signals. It is established that for low beliefs, strategic defaults occur in equilibrium as the borrower defaults on his loans despite having the ability to repay them. Further, as the ancillary signals become increasingly informative of the borrower's type, the range of beliefs over which strategic defaults occur expands. This increase in strategic defaults highlights an unintended negative effect of allowing informative signals to influence beliefs. On the upside, the informative signals allow lenders to learn the borrower's type more quickly.

Keywords: Credit bureaus; Information; Signals; Repeated games (search for similar items in EconPapers)
JEL-codes: C72 C73 D82 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:134:y:2017:i:c:p:269-283

DOI: 10.1016/j.jebo.2016.12.002

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