Could dishonest banks be disciplined ?

Nabi, Mahmoud Sami and Ben Souissi, Souraya (2011): Could dishonest banks be disciplined ?

Abstract

Could a credit bureau incite banks to report correct information about their borrowers? We show that banks will choose the incorrect information sharing in the last period to increase their profits. Interestingly, however, it is shown that this strategy is optimal at the second period only if the proportion of successful projects is superior to 50%. In that case the Credit Bureau should enforce a sufficiently high penalty in order to incite banks to share information honestly. The penalty threshold that conditions the efficiency of the credit bureau’s role is endogenously derived.

• Item Type: MPRA Paper
• Language: English
• Keywords: Information sharing, penalty, incitation mechanism, credit bureau.
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L14 - Transactional Relationships ; Contracts and Reputation ; Networks; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Akerlof, G.A. (1970) "The Market for "Lemons": Quality Uncertainty and the Market Mechanism", The Quarterly Journal of Economics, vol.84, No.3, pp.488-500.

Bofondi, M. and Gobbi, G.(2006) "Informational Barriers to Entry into Credit Markets", Review of Finance, vol.10 , pp.39-67.

Brevoort, K.P and Wolken, J.D (2008) "Does Distance Matter in Banking?", Board of Governors of the Federal Reserve System (U.S.), Finance and Economics Discussion Series, 2008-34.

Brown, M., Jappelli, T. and Pagano, M. (2008) "Information sharing and credit: Firm-level evidence from transition countries", ECGI- Finance Working Paper No. 201/2008.

Brown,M. and Zehndr, C. (2007) "Credit reporting , relationship banking and loan repayment", v, vol.39, No.8, pp.1883-1918.

Dell'Ariccia, G. (2001) "Asymmetric information and the structure of the banking industry", European Economic Review, vol.45, pp.1957-1980.

Djankov, S., Mcliesh, C. and Schleifer, A. (2006), "Private Credit in 129 Countries", NBER Working Ppaer No. W11078.

Fischer, K.H (2000) "Acquisition of Information in Loan Markets and Bank Market Power - An empirical Investigation", Social Science Research Network.

Foucault, T. and Lescourret, L. (2001) "Information Sharing, Liquidity and Transaction Costs in Floor-Based Trading Systems", CRES Working Paper No. 2001-18.

Gorton, G. and Winton, A. (2002) "Financial Intermediation", NBER Working Ppaer No. W8928.

Grimaud, A. and Rochet, J-C. (1994) « L'apport du modèle de concurrence monopolistique à l'économie bancaire », Revue économique. 1994, n°3. pp. 715-726.

Hoeser, U. and Simoulin, V. (2002) "Asymétrie d'information et organisation bancaire : le cas d'une banque d'investissement spécialisée", Gérer et comprendre No. 68.

Hotelling, H. (1929) "Stability in Competition", The Economic Journal,vol.39, No.53, pp.41-57.

Kast, R. and Molkhou, V. (1998) "Asymétrie d'information et contrats bancaires : l'intérêt des "prêts-tests"", GREQAM Working Paper No.98a12.

Klein, B. and Leffler, K.B. (1981) "The role of market forces in assuring contractual performances", Journal of Political Economy, vol.89, No.4, pp.615-641.

Koessler, F. (2002) "Strategic Knowledge Sharing in Bayesian Games: Applications ", BETA Working Paper No. 2002-02.

Padilla, A.J. and Pagano, M. (1997) "Endogenous communication among lenders and entrepreneurial incentives", The Review of Financial Studies, vol.10, No.1, pp.205-236.

Pagano, M. and Jappelli, T. (1993) "Information Sharing in Credit Markets", The Journal of Finance, vol.48, No.5, pp.1693-1718.

Pagano, M. and Jappelli, T. (2002) "Information sharing, lending and defaults: Cross-country evidence", Journal of Banking and Finance, , vol.26, No.10, pp.2017-2047.

Petersen, M.A. and Rajan, R.G. (2000) "Does distance still matter? The information revolution in small business lending", NBER Working Papers No. 7685.

Petersen, M.A. and Rajan, R.G. (1994) "The effect of credit market competition on lending relationships", Federal Reserve Bank of Chicago in its series Working Paper Series, Issues in Financial Regulation No WP- 97-14.

Powell, A., Mylenko, N., Miller, M. and Majnoni, G. (2004) "Improving credit information, bank regulation and supervision: on the role and design of public credit registries", World Bank Policy Research Working Ppaer Series No.3443.

Sami, H. and Delorme, A. (2004) "Diffusion d'information et risque de crédit dans les économies émergentes", Colloque Le Financement du Développement et Rédustion de la Pauvreté - Marrakech 2004. http://www.aed.auf.org/IMG/pdf/H.Sami.pdf

Semenova, M. (2008) "Information sharing in credit markets : incentives for incorrect information reporting", Comparative Economic Studies, Vol. 50, No. 3, pp. 381-415(35)

Simon, D. Carale, ML. Andrei, S. (2006) "Private credit in 129 countries", Journal of Financial Economics, Vol. 84, No. 2, pp. 299 - 329

Stiglitz, J.E. and Weiss, A. (1992) "Asymmetric Information in Credit Markets and Its Implications for Macro-Economics", Oxford Economic Papers, New Series, vol.44, No.4, pp.694-724.

Stiglitz, J.E. and Weiss, A. (1981) "Credit Rationing in Markets with Imperfect Information", The American Economic Review, vol.71, No.3, pp.393-410.

Thakor,A.V. and Callaway, R. (1983) "Costly Information Production Equilibria in the Bank Credit Market with Applications to Credit Rationing" The Journal of Financial and Quantitative Analysis, vol.18, No.2, pp.229-256.

Vercammen, J.A. (1995) "Credit Bureau Policy and Sustainable Reputation Effects in Credit Markets", Economica, New Series, vol.62, No.248, pp.461-478.

Vives, X. Trade Association Disclosure rules, incentives to share information, and welfare (1990) "Trade Association Disclosure rules, incentives to share information, and welfare", Rand Journal of Economics, vol.21, No.3, pp.409-430.