Equilibrium Effects of Asymmetric Information: Evidence from a Natural Experiment in Consumer Credit (with Christopher Neilson, Luis Opazo and Seth Zimmerman)
Abstract:
We investigate the equilibrium e
ffects of information asymmetries in credit markets in the context of a lar
ge-scale policy change that induced an information asymmetry between lender
s and consumer credit borrowers in Chile. In 2012, Chilean credit bureaus w
ere forced to stop reporting past defaults for 2.8 million individuals with
relatively low default amounts. These individuals made up 21% of the count
ry’s adult population and approximately 67% of borrowers in default. Using
panel data of the universe of bank borrowers in Chile, we show that the pol
icy change had both direct effects on the beneficiaries and equilibrium eff
ects on the broader credit market. We first exploit a discontinuity in elig
ibility based on default amount to show that borrowing rises for the benefi
ciaries of deletion relative to non-beneficiaries following policy implemen
tation. However, consumer borrowing falls by approximately 5% for non-benef
iciaries in the quarter following policy implementation, while the median i
nterest rate for small loans also rises by 5 percentage points from a base
of 27%. Equilibrium responses are larger for individuals who are pooled wit
h relatively more past defaulters based on demographic characteristics obse
rvable to lenders.