The Carrot Effect of Informing Borrowers about Credit Reporting : Two Randomized Field Experiments

Using two randomized field experiments, we examine how warning borrowers that their loan performance will be reported to a public credit registry affects their loan take-up and repayment decisions. We show that credit warnings increase loan take-up rates. Reducing incumbent lenders' informational rents and improving access to informal or formal credit are the main drivers. Moreover, credit warnings reduce default rates by 32–52%. This reduction is comparable for borrowers who receive the credit warning before and after the loan take-up, which suggests that credit warnings have little net effect on borrowers' credit-risk composition due to selection