DP17649 Big Techs vs Banks
We study an economy in which large technology companies (big techs) provide credit to firms operating on their platforms. We focus on the trade-off between privacy and efficiency in the interaction between big tech and bank lending. Big techs have access to troves of data on firms who trade on their platforms. This reduces privacy for their clients but results in more efficient use of client-risk information curtailing strategic defaults in an environment with limited enforcement. Bank loans offer greater privacy but must break even on average across different risks, resulting in inefficient defaults by solvent rms. Furthermore, big techs also have stronger enforcement of credit repayment since they can exclude a defaulter from their ecosystem. Fearing expropriation of their continuation values, firms will not borrow from an all too powerful big tech that has superior information as well as superior enforcement. Competitive privacy offered by big techs can attract intermediate-risk types and eliminate inefficient defaults, where the safest firms prefer to enjoy information rent on a bank loan. The way big techs share information, i.e., by providing information publicly or in a private way, entails different outcomes in terms of efficiency.
