The authors study this provision in a model of repeated borrowing and lending with moral hazard and adverse selection. They analyze its effects on borrowers' incentives and access to credit, and identify conditions under which it is optimal. The authors argue that “forgetting” must be the outcome of a regulatory intervention by the government. Their model's predictions are consistent with the cross-country relationship between credit bureau regulations and the provision of credit, as well as the evidence on the impact of these regulations on borrowers' and lenders' behavior.
Bankruptcy: Is It Enough to Forgive or Must We Also Forget?
WP 11-14 - In many countries, lenders are restricted in their access to information about borrowers' past defaults.