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Nonlinear incentives and mortgage officers’ decisions

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  • Tzioumis, Konstantinos
  • Gee, Matthew
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    Abstract

    In 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 Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 107 (2013)
    Issue (Month): 2 ()
    Pages: 436-453

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    Handle: RePEc:eee:jfinec:v:107:y:2013:i:2:p:436-453

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Nonlinear incentives; Quotas;

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    Cited by:
    1. Sumit Agarwal & Itzhak Ben-David, 2014. "Do Loan Officers’ Incentives Lead to Lax Lending Standards?," NBER Working Papers 19945, National Bureau of Economic Research, Inc.

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