AbstractWe o¤er a theoretical framework to analyze corporate lending when loan o¢ cers must be incentivized to prospect for loans and to transmit the soft information they obtain in that process. We explore how this multi-task agency problem shapes loan o¢ cerscompensation, banksuse of soft information in credit approval, and their lending standards. When competition intensi es, prospecting for loans becomes more important and banksinternal agency problem worsens. In response to more competition, banks lower lending standards, may choose to disregard soft and use only hard information in their credit approval, and in that case reduce loan o¢ cers to salespeople with steep, volume-based compensation. Our model generates excessive lendingas banksoptimal response to an internal agency problem. JEL Classification: D82, G21, L13.
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Bibliographic InfoPaper provided by European Central Bank in its series Working Paper Series with number 1439.
Length: 52 pages
Date of creation: May 2012
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Other versions of this item:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-08 (All new papers)
- NEP-BAN-2012-07-08 (Banking)
- NEP-CTA-2012-07-08 (Contract Theory & Applications)
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