The Supply and Demand Side Impacts of Credit Market Information

We utilize a unique pair of experiments to study the precise ways in which reductions in asymmetric information alter the outcome in a credit market. We formulate a general model in which the information set held by lenders, and what borrowers believe their lenders to know, enter separately. This model illustrates that non-experimental identification of the supplyand demand-side information in a market will be confounded. We then present a unique natural experiment, wherein a Guatemalan credit bureau was implemented without the knowledge of borrowers, and subsequently borrowers were given a randomized course describing the existence and workings of the bureau. Using this pairing of randomized and natural experiment, we find that the most powerful effect of new information in the hands of lenders is seen on the extensive margin, in their ability to select better clients. Changes in contracts for ongoing borrowers are muted. When borrower in group loans learn that their lender possesses this new information set, on the other hand, we see strong responses on both the intensive margin (changes in moral hazard) and the extensive margin (groups changing their composition to improve performance). We find some evidence that disadvantaged and female borrowers are disproportionately impacted. Our results indicate that credit bureaus allow for large efficiency gains, that these gains are augmented when borrowers understand the rules of the game, and that economic mobility both upwards and downwards is likely to be increased. ∗ Department of Agricultural and Resource Economics, U.C. Berkeley. [email protected], [email protected] ** International Relations/Pacific Studies, U.C. San Diego, 9500 Gilman Drive, La Jolla, CA, 92093-0519. [email protected] We are indebted to Michael Carter, Dean Karlan, and Chris Woodruff for helpful guidance with this study, and to USAID-Basis for financial support.