Borrowing decisions and repayment capacity: can regulation alleviate individual behavioural biases?

This paper analyses debt decision making of individuals, being aware that any debt decision is an interactive process that borrowers integrally share with lenders. We assume that the quantity and quality of information used in consumer credit markets- both demand and supply side- are able to influence some behavioural biases that may interfere with sound debt decision making. We apply a natural experiment, available in Italy, due to the Legislative Decree N. 141 of 13th August 2010 that reformed the consumer credit market thanks to two simultaneous and combined patterns of improved information: strengthened pre-contractual information, on the demand side, and mandatory creditworthiness evaluation, on the supply side. This law offers a cut-off date to test if enhanced information is able to improve borrowing decision making. Our findings support that in the very short term, the law enforcement shows a reduction of bad behaviours toward loan requests, with a decrease of repetitions of loan requests when arguably induced by obstinacy behaviors. Moreover, in the medium term, the new consumer credit regulation has significantly improved customers’ repayment ability, enhancing the quality of credit distribution, with respect to the pre-law situation. These evidences shed an optimistic evaluation of effectiveness of information in improving debt behaviours, even when introduced by a legislative action. Nevertheless, caution has to be taken, because a systematic ‘better information-better behaviour’ relationship cannot be assured. Definitively, this effectiveness has been shown to be improved by the conjunct adaptation of behaviours on both the demand and offer sides of the consumer credit marketplace.