Endogenous Communication Among Lenders and Entrepreneurial Incentives
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.
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By giving away information and profits in future periods, the bank may make higher current profits by encouraging additional entrepreneurial effort.
“Essentially, by giving away information and pro®ts in future periods, the bank may make higher current pro®ts by encouraging additional entrepreneurial eort.”
From The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle (1998) · cites this paper as Padilla and Pagano (1997)
Banks may increase their profits by sharing some of their private information about the condition of a small business (e.g., by giving this information to a credit bureau).
“Padilla and Pagano (1997) showed that banks may increase their pro®ts by sharing some of their private information about the condition of a small business (e.g., by giving this information to a credit bureau).”
From The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle (1998) · cites this paper as Padilla and Pagano (1997)
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N. Berger, A., & F. Udell, G. (1998) · Journal of Banking & Finance · doi:10.1016/s0378-4266(98)00038-7 · Cited by 3,690 · see citing works
“Padilla and Pagano (1997) showed that banks may increase their profits by sharing some of their private information about the condition of a small business (e.g., by giving this information to a credit bureau).”
Competition, Adverse Selection, and Information Dispersion in the Banking Industry: Table 1
Marquez, R. (2002) · Review of Financial Studies · doi:10.1093/rfs/15.3.901 · Cited by 417 · see citing works
Behavior-based price discrimination and customer information sharing
De Nijs, R. (2017) · International Journal of Industrial Organization · doi:10.1016/j.ijindorg.2016.12.003 · Cited by 34 · see citing works
What drives the disintegration of the loan origination value chain in the banking business
Scannella, E. (2015) · Business Process Management Journal · doi:10.1108/bpmj-02-2014-0017 · Cited by 10 · see citing works
- Authors
- Padilla, A. J., & Pagano, M.
- Affiliations
- University of Naples Federico II (IT)
- ORCID
- Pagano, Marco
- Venue
- Review of Financial Studies
- Publisher
- Oxford University Press (OUP)
- Published
- 1997-01
- Volume
- 10
- Issue
- 1
- Pages
- 205-236
- ISSN
- 0893-9454 (ISSN-L)
- 1465-7368
- OpenAlex
- W2105063197
- Cited by
- 409
- References
- 0
- Citations by year
- 2026: 14 · 2025: 13 · 2024: 13 · 2023: 11 · 2022: 15 · 2021: 17 · 2020: 12 · 2019: 14 · 2018: 20 · 2017: 26 · 2016: 22 · 2015: 27 · 2014: 18 · 2013: 15 · 2012: 16
- FWCI
- 11.95
- Type
- journal article
- Language
- en
- Open access
- closed
- Locations
- Review of Financial Studies (publishedVersion)
- OpenGrey (Institut de l'Information Scientifique et Technique) (submittedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Topics
- Social Sciences › Economics, Econometrics and Finance › Finance › Banking stability, regulation, efficiency
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Merger and Competition Analysis
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Economic theories and models
- Keywords
- information sharing, bank competition, entrepreneurship incentives, commitment, interest rates, credit market competition, social welfare (welfare economics), bank profitability
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