Information Misreporting in the Credit Market: Analysis of a Credit Bureau's Disciplinary Role

Abstract

Could a Credit Bureau incite banks to report correct information about their borrowers? We develop a spatial competition model a-la Salop (1979) with n interacting banks having the possibility to misreport information to a Credit Bureau. We show that the Credit Bureau can discipline banks and incite them to share information honestly by withdrawing the license of the ‘dishonest’ bank and enforcing a sufficiently high penalty. It is interestingly shown that the penalty threshold that conditions the effectiveness of the Credit Bureau's role depends on the structure of the credit market and the banks’ far-sightedness about their future profits.