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Endogenous Communication Among Lenders and Entrepreneurial Incentives

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Author Info

  • Padilla, A.J.
  • Pagano, M.

Abstract

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. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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Bibliographic Info

Paper provided by Centro de Estudios Monetarios Y Financieros- in its series Papers with number 9407.

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Length: 28 pages
Date of creation: 1994
Date of revision:
Handle: RePEc:fth:cemfdt:9407

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Postal: Centro de Estudios Monetarios Y Financieros. Casado del Alisal, 5-28014 Madrid, Spain.
Phone: 914290551
Fax: 914291056
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Web page: http://www.cemfi.es/
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Keywords: FINANCIAL MARKET; DECISION MAKING;

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