Information disclosure and the choice between arm’s-length and inside debt

Sumit Agarwal and Robert Hauswald

Journal of Monetary Economics, 2021, vol. 117, issue C, 1008-1022

Abstract: To study the consequences of information disclosure on economic exchange, we compare the differential information content of in-person (inside) and online (arm’s-length) loans. Confidential disclosures crucially shape the strategic dynamics of bank-borrower interaction and lead to trade-offs between the availability and pricing of credit. Inside debt carries higher interest but is more readily available whereas the opposite holds true for arm’s-length loans. Anticipating the bank’s use of inside information, firms strategically disclose information and switch lenders, which ultimately affects default. The observed availability-price trade-off corresponds to a novel mechanism for mitigating adverse selection relying on self-selection and disclosure.

Keywords: Information disclosure; Debt type; Credit screening; Information content (search for similar items in EconPapers)
JEL-codes: D44 G21 L11 L14 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:117:y:2021:i:c:p:1008-1022

DOI: 10.1016/j.jmoneco.2020.08.001

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