Abstract
In many countries, in addition to negative credit information such as loan default and arrears, positive credit information is also exchanged on a voluntary and reciprocal basis. Employing optimal credit decision models of profit maximizing banks, and utilizing a unique dataset of 2 million consumer loan obligors in Korea, we investigate the economic effects of sharing positive credit information in addition to negative credit information already exchanged. We find that the discriminatory power of the credit scoring model improves significantly. We proceed to investigate the economic effects of the information gap in a competitive credit market by assuming two representative banks that differ only in the level of credit information sharing. The bank that utilizes negative information only suffers from deterioration of the borrower pool and reduced profit, as high credit risk borrowers are more concentrated on this bank due to underpricing of risks. Our finding suggests that banks have incentives to voluntarily participate in the positive information sharing mechanism, since even a small difference in discriminatory power stemming from the information gap may lead to a significant fall in profitability as the distribution of borrower quality changes endogenously due to adverse selection problems.
Published Version
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