Banking

Bankruptcy: Is It Enough To Forgive Or Must We Also Forget?

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Executive Summary

In many countries, lenders are restricted in their access to information about borrowers' past defaults. The authors study this provision in a model of repeated borrowing and lending with moral hazard and adverse selection. They analyze its effects on borrowers' incentives and access to credit, and identify conditions under which it is optimal. They argue that "Forgetting" must be the outcome of a regulatory intervention by the government. The model's predictions are consistent with the cross-country relationship between credit bureau regulations and the provision of credit, as well as the evidence on the impact of these regulations on borrowers' and lenders' behavior.

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