Regulating Information and Competition: Evidence from Fintech SME Loans

• In Event: Taxes and Firms in Developing Countries

Abstract

How do market power and information availability affect the efficiency of emerging informational-rich lending markets? Leveraging data from a major fintech lending provider for SMEs in China and an interest rate discount policy, we analyze the presence of selection in lending markets and how it interacts with market power. Our findings reveal a decrease in the average probability of loan repayment following interest rate reductions, indicating advantageous selection. Alternative explanations, such as moral hazard, observable heterogeneity, and dynamic portfolio optimization, cannot fully account for that pattern. Building on our estimated demand elasticities and selection effects, we assess the welfare implications of information-sharing and pro-competition policies, finding that among a restricted simple set of policies, ensuring competition and mandating information to be shared across financial providers results in the largest surplus gains.

Author

• Andre Sztutman, Carnegie Mellon University