Adverse Selection, Moral Hazard, and Credit Information Systems: Theory and Experimental Evidence

We develop a model that derives “screening” and “incentive” effects of credit information systems that mitigate problems of adverse selection and moral hazard in credit markets. We also derive a “credit expansion” effect in which borrowers with clean credit records receive larger and more favorable equilibrium loan contracts. The credit expansion effect increases default rates, but does not overwhelm the reduction in portfolio default from screening and incentive effects. We then summarize results from a natural experiment using the sequential implementation of a credit information system in Guatemala and a field experiment in which we randomly informed groups of borrowers about the existence of the system shortly after its implementation. The experimental results offer substantial support to the effects posited in our model. *Craig McIntosh: School of International Relations and Pacific Studies, University of California at San Diego, 9500 Gilman Drive, La Jolla, CA 92093-0519, e-mail: [email protected]. **Bruce Wydick: Department of Economics, University of California at Santa Barbara (visiting 2006-07) and University of San Francisco, San Francisco, CA 94117, e-mail: [email protected]. We wish to thank other members of our research team, Alain de Janvry, Betty Sadoulet, Tomas Rosada, and Jill Luoto, along with helpful input from Javier Birchenall, Michael Carter, Eric Fisher, Anna Goeddeke, Dean Karlan, Peter Kuhn, Tee Kilenthong, Rachel Kranton, Margaret Miller, Chris Woodruff, and seminar participants at UC Santa Barbara, UC Berkeley, UC Davis, and the Federal Reserve Banks of Philadelphia and San Francisco for helpful comments and encouragement. Financial support from BASIS/USAID , the Leo T. McCarthy Foundation, and the Jesuit Foundation is gratefully acknowledged.