Does information sharing reduce the role of collateral as a screening device?

Abstract

Information sharing and collateral are both devices that help banks reduce the cost of adverse selection.We examine whether they are likely to be used as substitutes (information sharing reduces the need for collateral) or complements. We show that information sharing via a credit bureaus and registers may increase, rather than decrease, the role of collateral: it can be required in loans to high-risk borrowers in cases when it is not in the absence of information sharing. Higher adverse selection makes the use of collateral more likely both with and without information sharing. Our results are in line with recent empirical evidence.

Information Asymmetry, Financialisation and Financial Access

“…Second, with regard to the connection of the findings with broad strands of the literature, it is reasonable to infer that the findings on financial activity are largely consistent with the stream of literature supporting the positive role of ISOs in stimulating financial access (Padilla & Pagano, 2000;Jappelli & Pagano, 2002, 2006Bennardo et al, 2015;Asongu et al 2017a, whereas the results on financial allocation efficiency are largely in line with the contrasting stream on the negatives of ISOs (Karapetyan & Stacescu, 2014a;Jappelli & Pagano, 2006;Karapetyan & Stacescu, 2014b;. It is important to note that this comparative emphasis in light of the extant conflicting literature is exclusively based on the significant findings from regressions related to financial activity relative to insignificant results pertaining to financial allocation efficiency.…”

Information Asymmetry and Insurance in Africa

“…The empirical literature is also broadly consistent on the position that such information asymmetry between lenders and borrowers can be alleviated through the establishment of information sharing offices that readily and timeously collect and exchange information on borrowers' characteristics in order to reduce adverse selection experienced by banks on the one hand and moral hazard from borrowers on the other (Brown et al, 2009;Djankov et al, 2007;Boateng et al, 2018). The studies broadly support the perspective that ISO enhances credit expansion as well as constitutes a relevant determinant of profitability and competition in the banking and insurance industry (Pagano & Jappelli, 1993;Padilla & Pagano, 2000;Brown & Zehnder, 2010;Karapetyan & Stacescu, 2014a, 2014b. However, there is another strand of the literature which posits that ISO may not engender the postulated theoretical appeals.…”

Information asymmetry, financialization, and financial access

“…Second, with regard to the connection of the findings with broad strands of the literature, it is reasonable to infer that the findings on financial activity are largely consistent with the stream of literature supporting the positive role of ISOs in stimulating financial access (Asongu, Anyanwu, & Tchamyou, ; Asongu, Le Roux, & Tchamyou, ; Bennardo, Pagano, & Piccolo, ; Jappelli & Pagano, , ; Padilla & Pagano, ), whereas the results on financial allocation efficiency are largely in line with the contrasting stream on the negatives of ISOs (Asongu et al, ; Jappelli & Pagano, ; Karapetyan & Stacescu, ,). This comparative emphasis in light of the extant conflicting literature is exclusively based on the significant findings from regressions related to financial activity relative to insignificant results pertaining to financial allocation efficiency.…”