Limited credit records and market outcomes

• In most modern credit markets, credit registers store and share information regarding borrowers' past behavior. Such information is often removed after a finite number of years as mandated by privacy protection laws. While these laws are motivated by privacy concerns and by the desire to provide a fresh start to unlucky borrowers, they are difficult to justify from an economic perspective, since they effectively prescribe the removal of possibly relevant public information. This paper tries to assess the impact of different lengths of credit records on borrowers' behavior and market outcomes. To do so, I study a stylized credit market for small loans, and demonstrate that limited records endogenously give rise to beneficial reputation effects, which can alleviate the distortions caused by asymmetric information. More precisely, I show that when moral hazard is high, limited records can achieve higher welfare and lead to a lower default rate than records that show all, or nothing, of the past history.

Ämnesord

SAMHÄLLSVETENSKAP  -- Ekonomi och näringsliv (hsv//swe)

SOCIAL SCIENCES  -- Economics and Business (hsv//eng)

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