Lendersʹ reputation and the soft budget constraint

Suppose at t=0 lenders can choose whether to be “tough” or “soft,” and some borrowers learn the lendersʹ type (reputation). In a decentralized lending market, being tough is optimal for a wider range of parameters than under centralization, because a soft lender who refinances poor projects is hurt by the tough lendersʹ presence, as the quality of the lendersʹ project pool is affected by the other lendersʹ reputation.