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Endogenous Communication Among Lenders and Entrepreneurial Incentives
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Endogenous Communication Among Lenders and Entrepreneurial Incentives

Author

Listed:
  • Padilla, A.J.
  • Pagano, M.

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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Padilla, A.J. & Pagano, M., 1994. "Endogenous Communication Among Lenders and Entrepreneurial Incentives," Papers 9407, Centro de Estudios Monetarios Y Financieros-.
    • Handle: RePEc:fth:cemfdt:9407
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    Keywords

    FINANCIAL MARKET; DECISION MAKING;

    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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