Endogenous Communication Among Lenders and Entrepreneurial Incentives

If banks have an informational monopoly about their clients, borrowers may curtail their effort level for fear of being exploited via high inter-est rates in the future. Banks can correct this incentive problem by committing to share pri-vate 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. One often observes that lenders communicate to each other information about the creditworthiness of their customers. Sometimes this informational exchange is so intense and frequent as to be intermediated by This article has benefited from the comments of participants at the CEPR