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 i nterest rates in the future. Banks can correct this incentive problem by committing to share private information with other lenders. The fie rcer competition triggered by information sharing lowers future intere st rates and future profits of banks, But, provided banks retain an in itial informational advantage, their current profits are raised by the borrowers' higher effort. This trade-off determines the banks' willin gness to share information, Their decision affects credit market compe tition, interest rates, volume of lending, and social welfare.