What If Borrowers Were Informed about Credit Reporting? Two Natural Field Experiments

Using two natural field experiments, we examine how warning individual retail borrowers that their loan performance will be reported to a public credit registry before and after the loan take-up affects their borrowing behavior. We show that credit warnings reduce default rates by 3.7 to 7 percentage points and increase loan take-up rates by 4.1 percentage points, which suggests that credit warnings benefit both lenders and borrowers. The main drivers appear to be borrowers’ anticipation of a reduction in lenders’ informational rents and improved repayment incentives. Moreover, the reduction in default rates is comparable for borrowers who receive the credit warning before and after the loan take-up. As credit warnings received before but not after a loan take-up can affect the borrower pool, and thus the overall credit risk of the pool, the results suggest that credit warnings have little net effect on the pool’s credit risk due to selection.