Credit reporting, relationship banking, and loan repayment

Abstract

How does information sharing between lenders affect borrowers repayment behavior? We show - in a laboratory credit market - that information sharing increases repayment rates, as borrowers anticipate that a good credit record improves their access to credit. This incentive effect of information sharing is substantial when repayment is not third-party enforceable and lending is dominated by one-shot transactions. If, however, repeat interaction between borrowers and lenders is feasible, the incentive effect of credit reporting is negligible, as bilateral banking relationships discipline borrowers. Information sharing nevertheless affects market outcome by weakening lenders' ability to extract rents from relationships. © 2007 The Ohio State University.