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Sharing Default Information as a Borrower Discipline Device

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Abstract

Creditors often share information about their customers' credit record. Besides helping them to spot bad risks, this informational exchange acts as a disciplinary device. If creditors are known to exchange data about defaults, borrowers must consider that default on a current lender would disrupt their credit rating with all the other lenders. This raises their incentive to perform. But sharing more detailed information can reduce this disciplinary effect: when lenders only disclose past defaults, borrowers' incentives to perform may be greater than when lenders share all their information. In some instances, by "fine-tuning" the type and accuracy of the information shared, lenders can raise borrowers' incentives to their first-best level.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 21.

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Date of creation: 01 May 1999
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Publication status: Published in European Economic Review, 2000, vol. 44, pages 1951-80
Handle: RePEc:sef:csefwp:21

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Keywords: Fiscal policy; national saving; contractionary fiscal expansions;

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