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Sharing Default Information as a Borrower Discipline Device

  • Padilla, A.J.
  • Pagano, M.

Creditors often share information about their customers' credit records. Besides helping them to spot bad risks, this acts as a disciplinary device. If creditors are known to inform one another of defaults, borrowers must consider that default on one lender would disrupt their credit rating with all the other lenders. This increases their incentive to perform. However, sharing more detailed information can reduce this disciplinary effect: borrowers' incentives to perform may be greater when lenders only disclose past defaults than when they 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 Centro de Estudios Monetarios Y Financieros- in its series Papers with number 9911.

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Length: 33 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:fth:cemfdt:9911
Contact details of provider: Postal: Centro de Estudios Monetarios Y Financieros. Casado del Alisal, 5-28014 Madrid, Spain.
Phone: 914290551
Fax: 914291056
Web page: http://www.cemfi.es/
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  1. Milgrom, Paul & Roberts, John, 1994. "Comparing Equilibria," American Economic Review, American Economic Association, vol. 84(3), pages 441-59, June.
  2. Sharpe, Steven A, 1990. " Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships," Journal of Finance, American Finance Association, vol. 45(4), pages 1069-87, September.
  3. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
  4. Lummer, Scott L. & McConnell, John J., 1989. "Further evidence on the bank lending process and the capital-market response to bank loan agreements," Journal of Financial Economics, Elsevier, vol. 25(1), pages 99-122, November.
  5. Cremer, Jacques, 1995. "Arm's Length Relationships," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 275-95, May.
  6. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 689-721, August.
  7. Padilla, A.J. & Pagano, M., 1994. "Endogenous Communication Among Lenders and Entrepreneurial Incentives," Papers 9407, Centro de Estudios Monetarios Y Financieros-.
  8. Milgrom, P. & Shannon, C., 1991. "Monotone Comparative Statics," Papers 11, Stanford - Institute for Thoretical Economics.
  9. Douglas W. Diamond, 1998. "Reputation Acquisition in Debt Markets," Levine's Working Paper Archive 602, David K. Levine.
  10. Vercammen, James A, 1995. "Credit Bureau Policy and Sustainable Reputation Effects in Credit Markets," Economica, London School of Economics and Political Science, vol. 62(248), pages 461-78, November.
  11. Pagano, Marco & Jappelli, Tullio, 1993. " Information Sharing in Credit Markets," Journal of Finance, American Finance Association, vol. 48(5), pages 1693-1718, December.
  12. Milgrom, Paul & Roberts, John, 1990. "Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities," Econometrica, Econometric Society, vol. 58(6), pages 1255-77, November.
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