Endogenous Communication Among Lenders and Entrepreneurial Incentives

REVIEW OF FINANCIAL STUDIES, Vol. 10 No. 1

Posted: 26 Nov 1996

See all articles by Jorge Padilla

Jorge Padilla

Compass Lexecon

Marco Pagano

University of Naples Federico II - Department of Economics and Statistics; 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)

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.

JEL Classification: G14, D82

Suggested Citation

Padilla, Jorge and Pagano, Marco, Endogenous Communication Among Lenders and Entrepreneurial Incentives. REVIEW OF FINANCIAL STUDIES, Vol. 10 No. 1. Available at SSRN: https://ssrn.com/abstract=7934

Jorge Padilla

Compass Lexecon ( email )

Paseo de la Castellana 7
Madrid, 28046
Spain

Marco Pagano (Contact Author)

University of Naples Federico II - Department of Economics and Statistics ( email )

Via Cintia - Monte S. Angelo
Napoli, 80126
Italy
+39 081 675306 (Phone)
+39 081 7663540 (Fax)

Centre for Studies in Economics and Finance (CSEF) ( email )

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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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Sweden

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
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1000 Brussels
Belgium

HOME PAGE: http:/www.ecgi.org

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