Incentivizing Calculated Risk-Taking: Evidence from an Experiment with Commercial Bank Loan Officers
AbstractThis paper uses a series of experiments with commercial bank loan officers to test the effect of performance incentives on risk-assessment and lending decisions. We first show that, while high-powered incentives lead to greater screening effort and more profitable lending, their power is muted by both deferred compensation and the limited liability typically enjoyed by credit officers. Second, we present direct evidence that incentive contracts distort judgment and beliefs, even among trained professionals with many years of experience. Loans evaluated under more permissive incentive schemes are rated significantly less risky than the same loans evaluated under pay-for-performance.
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Bibliographic InfoPaper provided by Harvard Business School in its series Harvard Business School Working Papers with number 13-002.
Length: 69 pages
Date of creation: Jul 2012
Date of revision:
loan officer incentives; banking; emerging markets;
Other versions of this item:
- Cole, Shawn & Kanz, Martin & Klapper, Leora, 2012. "Incentivizing calculated risk-taking :evidence from an experiment with commercial bank loan officers," Policy Research Working Paper Series 6146, The World Bank.
- Shawn Cole & Martin Kanz & Leora Klapper, 2013. "Incentivizing Calculated Risk-Taking: Evidence from an Experiment with Commercial Bank Loan Officers," NBER Working Papers 19472, National Bureau of Economic Research, Inc.
- D03 - Microeconomics - - General - - - Behavioral Microeconomics; Underlying Principles
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
- J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
- L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-14 (All new papers)
- NEP-BAN-2012-07-14 (Banking)
- NEP-CTA-2012-07-14 (Contract Theory & Applications)
- NEP-EXP-2012-07-14 (Experimental Economics)
- NEP-HRM-2012-07-14 (Human Capital & Human Resource Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Bonuses and risk taking: Some experimental evidence to bolster commonsense
by Nicholas Gruen in Club Troppo on 2012-07-15 04:36:00
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