Credit Markets
Sharing information

While the informational asymmetries between lenders and borrowers that prevent the efficient allocation of credit are usually assumed to be exogenous, lenders often circumvent them in practice by exchanging private information. In many countries lenders pool their information on households through `credit bureaus', which collect and distribute information voluntarily supplied by their members, ensure that these data are provided promptly and accurately, and deny access to would-be free-riders. Such sharing should reduce informational asymmetries and bring financial intermediation a step closer to the paradigm of perfect capital markets.
In Discussion Paper No. 579, Research Fellow Marco Pagano and Research Affiliate Tullio Jappelli argue on theoretical grounds that lenders' incentives to share private information should be positively correlated with households' geographic mobility and the overall size of the consumer credit market. Also, once some lenders have agreed to form a credit bureau, others will tend to join, so they form natural monopolies. Information sharing may be discouraged, however, by fear of competition, so the incentive to share information should be greater when competition among lenders is limited by cost or regulatory factors. Technological innovations that reduce the costs of filing, organizing and distributing information should also foster information exchange.
Pagano and Jappelli compare these theoretical predictions with data on the extent of information sharing, the degree of geographic mobility and the size of the consumer credit market for 13 major OECD countries and evidence gathered from direct interviews with and questionnaires sent to individual credit bureaus and their associations. Geographic mobility and the size of the consumer credit market are indeed correlated with the amount and quality of information that credit bureaus provide. The quantities of information exchanged were greatest in Japan, the UK and the US, which exhibit relatively high geographical mobility and large consumer credit markets. Information sharing was minimal, however, in Belgium, Greece, Italy and Spain, which exhibit low mobility and small consumer credit markets. Regulatory safeguards for consumer privacy may also reduce the amount of information exchanged as in France until 1990.
Pagano and Jappelli also test their model on data on lending over the last century in the US where credit bureaus were established as early as the late nineteenth century. These results also indicate that growth in the size of the consumer credit market and increases in mobility were associated with the rise and spread of credit bureaus, whose activities were more recently given a powerful stimulus by the cost reductions associated with new technology.

Information Sharing in Credit Markets
Marco Pagano and Tullio Jappelli

Discussion Paper No. 579, October 1991 (IM/AM)