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Information Sharing and Rationing in Credit Markets

Jon Einar Flatnes

American Journal of Agricultural Economics, 2021, vol. 103, issue 3, 944-960

Abstract: This article studies the effect of utilizing past credit information about borrowers on interest rates, collateral requirements, and credit rationing. Specifically, I develop a two‐period lending model with asymmetric information and endogenous contract terms, assuming a pooling equilibrium. I show that when default information is utilized privately, contract terms decrease under reasonable assumptions. When default information is also shared with other lenders, non‐defaulters enjoy better contract terms in period 2, while defaulters are offered worse terms, resulting in reduced adverse selection and more equitable terms on average for risk‐neutral borrowers. Finally, when borrowers are aware that information is utilized, information sharing also reduces moral hazard, collateral requirements, and credit rationing for all borrowers.

Date: 2021
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Handle: RePEc:wly:ajagec:v:103:y:2021:i:3:p:944-960