Sharing Default Information as a Borrower Discipline Device

CSEF Working Paper No. 21

39 Pages Posted: 22 Mar 2000

See all articles by Jorge Padilla

Jorge Padilla

Compass Lexecon

Marco Pagano

CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF); Einaudi Institute for Economics and Finance (EIEF); Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: July 1999

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.

JEL Classification: E21, E62, H31

Suggested Citation

Padilla, Jorge and Pagano, Marco, Sharing Default Information as a Borrower Discipline Device (July 1999). CSEF Working Paper No. 21, Available at SSRN: https://ssrn.com/abstract=183972 or http://dx.doi.org/10.2139/ssrn.183972

Jorge Padilla

Compass Lexecon ( email )

Paseo de la Castellana 7
Madrid, 28046
Spain

Marco Pagano (Contact Author)

CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF) ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

Einaudi Institute for Economics and Finance (EIEF)

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Rome, 00187
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Research Institute of Industrial Economics (IFN)

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

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1000 Brussels
Belgium

HOME PAGE: http:/www.ecgi.org

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