Information Sharing in Credit Markets: Incentives for Incorrect Information Reporting

The introduction of institutions of credit information sharing – private credit bureaus and public credit registries – in the market for bank loans represents a possible solution of the information asymmetry problem which most creditors face. However, the possibility of information sharing influences the bank's incentives in two different ways. While it disciplines the borrowers, and therefore reduces the share of bad loans, a bank loses a competitive advantage, the monopolistic knowledge about the data in its clients' credit histories. Does the bank have an opportunity to use the benefits of information sharing without losing its competitive advantage and its clientele? One way to do so is to report false data on borrowers. In this paper, we analyse the bank's incentives to misreport given the bank cannot refuse to participate in the information sharing system, as membership is obligatory. Our main result is that the opportunity to get extra profit and to offer less-expensive credit to new clients explain why banks may prefer a strategy of dishonest behaviour. Comparative Economic Studies (2008) 50, 381–415. doi:10.1057/ces.2008.10