Information Sharing in Credit Markets




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    • Pagano is from the Università Bocconi, Milan, and CEPR, and Jappelli is from the Istituto Universitario Navale, Naples, and CEPR. We gratefully acknowledge the helpful comments of an anonymous referee, Richard Arnott, Patrick Bolton, Michael Brennan, Ian Cooper, Julian Franks, Michalis Haliassos, Fumio Hayashi, Julio Rotemberg, Antti Suvanto, and particularly Jorge Padilla and Xavier Vives. We also thank participants in seminars at Barcelona, Bilbao, Boston College, Helsinki, IGIER, LBS, University of Pennsylvania, MIT, and at the 1991 Symposium of the ESF Network of Financial Markets. Bruce Bargon, William Detlefsan, and Stuart Pratt have helped in understanding the operation of credit bureaus. We acknowledge financial support from CEPR under its SPES Programme (no. E89300105/RES) and from the Italian Ministry for Universities and Scientific and Technological Research.


We present a model with adverse selection where information sharing between lenders arises endogenously. Lenders' incentives to share information about borrowers are positively related to the mobility and heterogeneity of borrowers, to the size of the credit market, and to advances in information technology; such incentives are instead reduced by the fear of competition from potential entrants. In addition, information sharing increases the volume of lending when adverse selection is so severe that safe borrowers drop out of the market. These predictions are supported by international and historical evidence in the context of the consumer credit market.