Endogenous Communication Among Lenders and Entrepreneurial Incentives

A. Jorge Padilla; Marco Pagano

doi:10.1093/rfs/10.1.205

Endogenous Communication Among Lenders and Entrepreneurial Incentives

A. Jorge Padilla^1,2; Marco Pagano^2,3,4

¹ Centro de Estudios Monetarios y Financieros · ² Center for Economic and Policy Research · ³ Federico II University Hospital · ⁴ University of Naples Federico II

Review of Financial Studies 1997

If banks have an informational monopoly about their clients, borrowers may curtail their effort level for fear of being exploited via high interest rates in the future. Banks can correct this incentive problem by committing to share private information with other lenders. The fiercer competition triggered by information sharing lowers future interest rates and future profits of banks. But, provided banks retain an initial informational advantage, their current profits are raised by the borrowers’ higher effort. This trade-off determines the banks’ willingness to share information. Their decision affects credit market competition, interest rates, volume of lending, and social welfare.

DOI: 10.1093/rfs/10.1.205
Volume: 10 (1)
Pages: 205-236
Language: en
Export: BibTeX
Sources: crossref openalex