Data and Welfare in Credit Markets

We show how to measure the welfare effects arising from increased data availability. When lenders have more data on prospective borrower costs, they can charge prices that are more aligned with these costs. This results in an increase in total social welfare, and a transfer of surplus from borrowers to lenders. The magnitudes of the welfare changes can be estimated using only quantity data and variation in prices. We apply the methodology using administrative data on bankruptcy flag removals, and find that flag removal increases the surplus of previously bankrupt consumers substantially, at the cost of decreasing total social welfare modestly, suggesting that flag removals are a reasonably efficient tool for redistributing surplus to previously bankrupt borrowers