Mechanisms for reducing information asymmetries in the credit market: A review of the literature

Abstract

The objective of this article is to present a review of the literature on the mechanisms or factors that can limit the information asymmetries that exist between borrowers and lenders. Several mechanisms have been proposed in the literature. A distinction must be made between the mechanisms used by lenders (information gathering, credit rationing, restrictive clauses, control of borrowers) and those available to borrowers (personal financial contribution, indebtedness, dividends, guarantees, duration of the customer relationship, borrower profile, social capital, distance between lender and borrower). Two theoretical frameworks initially based on information asymmetries has been used to analyze these mechanisms. The agency theory suggests that lenders set up incentive mechanisms to overcome borrowers' information problems. In contrast, the signaling theory approach emphasizes the signaling efforts of borrowers in limiting their informational opacity to lenders. In addition, this paper presents the results of some empirical research conducted specifically in the context of the use of these mechanisms by banks and small and medium-sized enterprises.

Keywords: Reduction mechanisms, Information asymmetries, Credit market, Banks, SMEs.

JEL Classification: G32, G35

Paper type: Theoretical article