Sharing Default Information as a Borrower Discipline Device
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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