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Endogenous Communication among Lenders and Entrepreneurial Incentives

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  • Padilla, A Jorge
  • Pagano, Marco

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.

Suggested Citation

  • 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 205-236.
  • Handle: RePEc:oup:rfinst:v:10:y:1997:i:1:p:205-36
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    JEL classification:

    • 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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