Nonlinear incentives and mortgage officers’ decisions
AbstractIn the aftermath of the recent financial crisis, banks should ensure that their incentive compensation policies appropriately balance long-term risk with short-term rewards. Using daily output data from mortgage officers in a US commercial bank, we test the notion that nonlinear contracts create time-varying incentives for the employees and impose costs on the firm. We provide empirical evidence that mortgage officers greatly increase their output toward the end of each month, when the minimum monthly quota is assessed. This occurs through a combination of reducing the processing time and approving some marginal applications. We also find that mortgages originated on the last working day of the month have a higher likelihood of delinquency.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Financial Economics.
Volume (Year): 107 (2013)
Issue (Month): 2 ()
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Web page: http://www.elsevier.com/locate/inca/505576
Nonlinear incentives; Quotas;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
- M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
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