Does Information Sharing Reduce the Role of Collateral as a Screening Device?

Artashes Karapetyan, Bogdan Stacescu
2012 Social Science Research Network  
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
more » ... igher adverse selection makes the use of collateral more likely both with and without information sharing. Our results are in line with recent empirical evidence.
doi:10.2139/ssrn.2269252 fatcat:p5jb737funftbbm7vmahcjzojq