Using the model studied in Section 7.2.8, explain why better information regarding borrowers and their credit histories is likely to reduce the adverse effects of inequality on output.

Data from 7.2.8 

We often take markets for granted. When we do our shopping at the grocery store, it is rarely the case (though it happens) that we, as consumers, take what we need and do not pay for it or that the shopkeeper takes our money and then refuses to give us what we bought. The grocery store functions because such situations are the exception rather than the rule. What makes them exceptions? One possible answer is that people are generally honest and will not cheat each other. To a large extent, this argument is correct, but it does not tell the whole story. Hidden in the background is an enormous amount of social conditioning that permits such simultaneous exchange, as well as a legal mechanism that encourages conformity to the social norm of exchange.
Social mechanisms (such as on-the-spot public disgrace) are far weaker when the acts of “buying”
and “paying up” are separated in time. The perfect example of this is a loan, where money is advanced and must be repaid later. Everyday experience tells us that a potential borrower is screened much more thoroughly than a potential buyer. A borrower is typically screened for his or her ability to repay, as well as for past dealings, which signal not only ability but willingness to repay. We also know that defaults are often met by sanctions of various kinds. Nevertheless, if individuals can default on credit arrangements under the existing social and legal rules, then they well might.
This brings us to a statement of the obvious: markets cannot function unless there is a clear statement of the underlying social contract involved, and a clear and well-defined mechanism for punishing deviations from the norm. If I default on my credit card bill, I will be blacklisted on the computer of every credit rating organization and will not be able to use my credit card for a long time, longer than I might ever feel comfortable with. Hence I make every effort to avoid default.
Likewise, a small farmer who seeks loans from a village moneylender worries about repayment because default may mean a closed door in the future. If the farmer has assets that the moneylender can make use of, there may even be collateral put up for the loan, which will be lost in the event of a default. In the same way, entire countries are “encouraged” to go on servicing past debts by the threat of sanctions on future loans or on trade relationships.
In Chapter 14, we will study such credit markets in detail. For now, the moral is very simple indeed: what you have as collateral and the perceived extent to which you value the future relative to the present determine the degree to which you have access to the credit market.
This moral has a striking corollary. In unequal societies, the poor may lack access to credit markets for precisely the reason that they lack collateral. To the extent that credit is necessary to

(a) Start a small business,

(b) Educate oneself or one’s children,

(c) Buy inputs so that you can rent land and farm it,

(d) Smooth out consumption expenditures in a fluctuating environment, and a whole host of other things besides, the poor are shut out from (a), (b), (c), (d), and everything else that credit can nourish. (We are talking here of everyday activity, not the infrequent large loan to go to law school, or a mortgage on a house.) Note well that this shutout has nothing to do with the intrinsic characteristics of these individuals. They may be (and indeed are) just as honest as anyone else, but no bank or moneylender will bet money on it.
A missing or imperfect credit market for the poor is a fundamental characteristic of unequal societies. The macroeconomic implications can be quite severe, as the following simple model illustrates.