Endogenous Communication Among Lenders and Entrepreneurial Incentives
AbstractWhen banks have an informational monopoly about their borrowers, the latter incentives can be thwarted by the fear that the return on their effort will be partly appropriated by their banks via high future interest rates. Banks can correct this incentive problem through a commitment to share with other lenders their private information about the quality of their customers. The resulting competitive pressure forces them to forgo opportunistic behaviour in the future and encourages borrowers to perform better. As a result, information sharing among banks has two opposite effects on their profits: the borrowers' higher effort levels raise current profits (while each bank retains an informational advantage), but the fiercer competition triggered by information sharing lowers future profits. The trade-off between these two effects determines the banks' choice to sign an information-sharing agreement. Their decision affects the degree of banking competition, the level and time profile of interest rates charged to clientele and the volume of lending, as well as the welfare of borrowers.
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Bibliographic InfoPaper provided by Centro de Estudios Monetarios Y Financieros- in its series Papers with number 9407.
Length: 28 pages
Date of creation: 1994
Date of revision:
Contact details of provider:
Postal: Centro de Estudios Monetarios Y Financieros. Casado del Alisal, 5-28014 Madrid, Spain.
Web page: http://www.cemfi.es/
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FINANCIAL MARKET; DECISION MAKING;
Other versions of this item:
- Padilla, A Jorge & Pagano, Marco, 1997. "Endogenous Communication among Lenders and Entrepreneurial Incentives," Review of Financial Studies, Society for Financial Studies, vol. 10(1), pages 205-36.
- Padilla, Atilano Jorge & Pagano, Marco, 1996. "Endogenous Communication Among Lenders and Entrepreneurial Incentives," CEPR Discussion Papers 1295, C.E.P.R. Discussion Papers.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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