“Borrowing Decisions and Repayment Capacity: Can Regulation alleviate Individual Behavioural Biases?”,

The initial focus of the paper is placed on studying the demand-side of the consumer credit market. More precisely, it is analysed the debt decision making of individuals. This motivates the precise framing of the research hypothesis. Information is the vehicle to enhance credit consumer protection if and when it is empowered at both sides of the marketplace. The demand-side is stimulated to receive more and better information regarding contracts, in order to carefully consider their borrowing decisions. The supply-side is asked to foster detailed and codified information on customers’ creditworthiness, in order to improve their lending decisions. These two simultaneous and combined patterns of improved information allow us to expect a change of behaviours in the consumer credit market. The Italian consumer credit reform is mainly based on enhancement of information that is processed by both sides of the market, i.e., pre-contractual information and mandatory credit scoring. Therefore, enforcement of this law represents a natural experiment to comprehend, firstly, if information is able to reduce behavioural biases in consumer credit decisions and secondly, if sound debt behaviours can be stimulated by an exogenous legislative action. The findings support that in the very short term, the law enforcement cut-off date shows a reduction of bad behaviours toward loan requests, with a decrease of multi-positioning, and intraday positioning. 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 results give an optimistic view on the efficacy of a typical “rational tool” in the human decision process, since information in this paper appears to be capable of improving debt behaviours. It is even more hopeful due to the fact that this improvement is associated with a legislative action. Nonetheless, the conclusion consider that many pitfalls may interfere with the systematic and deterministic “better information-better behaviour” relationship. Missing this warning would imply the demolition of decades of behavioural studies that highlight the fragility of this link. The undoubtedly positive results have been caused by the conjunct adaptation of behaviours on both the demand and offer sides of the consumer credit marketplace. Improvement of behaviours is the very final outcome of an interactive process of information exchange, and also knowledge swap among borrowers and lenders, who undeniably share a common goal of improving their individual, but also common, well-being.