Abstract
To study the consequences of information disclosure on economic exchange, we compare the differential information content of in-person (inside) and online (arm’s-length) loans. Confidential disclosures crucially shape the strategic dynamics of bank-borrower interaction and lead to trade-offs between the availability and pricing of credit. Inside debt carries higher interest but is more readily available whereas the opposite holds true for arm’s-length loans. Anticipating the bank’s use of inside information, firms strategically disclose information and switch lenders, which ultimately affects default. The observed availability-price trade-off corresponds to a novel mechanism for mitigating adverse selection relying on self-selection and disclosure.
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