No abstract

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

Creditors often share information about their customers' credit records. Besides helping them to spot bad risks, this acts as a disciplinary device. If creditors are known to inform one another of defaults, borrowers must consider that default on one lender would disrupt their credit rating with all the other lenders. This increases their incentive to perform. However, sharing more detailed information can reduce this disciplinary e¤ect: borrowers' incentives to perform may be greater when lenders only disclose past defaults than when they share all their information. In some instances, by "…netuning" the type and accuracy of the information shared, lenders can raise borrowers' incentives to their …rst-best level.

Commercial banks frequently encounter optimistic entrepreneurs whose perceptions are biased by wishful thinking. Bankers are left with a difficult screening problem: separating realistic entrepreneurs from optimists who may be clever, knowledgeable, and completely sincere. We build a game-theoretic model of the screening process. We show that although entrepreneurs may practice self-restraint to signal realism, competition may lead banks to be insufficiently conservative in their lending, thus reducing capital-market efficiency. High collateral requirements decrease efficiency further. We discuss bank regulation and bankruptcy rules in connection with the problems that optimistic entrepreneurs present.