LawFin Research Seminar joint with Finance Seminar

Abstract:

We study the effects of hardening soft information on credit market competition with specialized lending. Our framework considers multi-dimensional information and distinguishes between the breadth (information span) and quality (signal precision) of data, capturing the emerging trend in fintech lending where traditionally subjective (“soft”) information becomes more objective and concrete (“hard”). In the model, two banks equipped with similar data processing systems possess hard signals about the borrower’s quality, and the specialized bank further interacts with the borrower, allowing it to access soft signals. Hardening soft information levels the playing field by reducing the winner’s curse for the non-specialized bank from the soft signal. In contrast, increasing the precision or correlation of hard information strengthens the informational advantage of the specialized bank.