Information Sharing and Information Acqusition in Credit Markets

Since information asymmetries have been identified as an important source of bank profits, it may seem that the establishment of information sharing arrangements such as credit registers and bureaus will lead to lower investment in acquiring information. However, banks base their decisions on both hard and soft information, and it is only the former type of data that can be communicated credibly. We show that hard and soft information are strategic substitutes, and that when hard information is shared, banks will invest more in soft information. This can potentially lead to more accurate lending decisions and favor small, informationally opaque borrowers. Higher invest- ment in soft technology offers important implications for borrower switching. We test our theory using firm-level data from 24 countries.