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Loan officer Incentives and the Limits of Hard Information

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  • Tobias Berg
  • Manju Puri
  • Jorg Rocholl
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    Abstract

    Poor loan quality is often attributed to loan officers exercising poor judgment. A potential solution is to base loans on hard information alone. However, we find other consequences of bypassing discretion stemming from loan officer incentives and limits of hard information verifiability. Using unique data where loans are based on hard information, and loan officers are volume-incentivized, we find loan officers increasingly use multiple trials to move loans over the cut-off, both in a regression-discontinuity design and when the cut-off changes. Additional trials positively predict default suggesting strategic manipulation of information even when loans are based on hard information alone.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19051.

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    Date of creation: May 2013
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    Handle: RePEc:nbr:nberwo:19051

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    1. Jose M. Liberti & Atif R. Mian, 2009. "Estimating the Effect of Hierarchies on Information Use," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 22(10), pages 4057-4090, October.
    2. Chamberlain, Gary, 1980. "Analysis of Covariance with Qualitative Data," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 47(1), pages 225-38, January.
    3. Guido Imbens & Thomas Lemieux, 2007. "Regression Discontinuity Designs: A Guide to Practice," NBER Technical Working Papers 0337, National Bureau of Economic Research, Inc.
    4. 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.
    5. Udell, Gregory F., 1989. "Loan quality, commercial loan review and loan officer contracting," Journal of Banking & Finance, Elsevier, Elsevier, vol. 13(3), pages 367-382, July.
    6. Manju Puri & Jörg Rocholl & Sascha Steffen, 2011. "Global retail lending in the aftermath of the US financial crisis: Distinguishing between supply and demand effects," NBER Working Papers 16967, National Bureau of Economic Research, Inc.
    7. Allen N. Berger & Nathan H. Miller & Mitchell A. Petersen & Raghuram G. Rajan & Jeremy C. Stein, 2002. "Does Function Follow Organzizational Form? Evidence From the Lending Practices of Large and Small Banks," Harvard Institute of Economic Research Working Papers 1976, Harvard - Institute of Economic Research.
    8. Andrew Hertzberg & Jose Maria Liberti & Daniel Paravisini, 2010. "Information and Incentives Inside the Firm: Evidence from Loan Officer Rotation," Journal of Finance, American Finance Association, American Finance Association, vol. 65(3), pages 795-828, 06.
    9. Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 125(1), pages 307-362, February.
    10. Jeremy C. Stein, 2002. "Information Production and Capital Allocation: Decentralized versus Hierarchical Firms," Journal of Finance, American Finance Association, American Finance Association, vol. 57(5), pages 1891-1921, October.
    11. Hausman, Jerry & Hall, Bronwyn H & Griliches, Zvi, 1984. "Econometric Models for Count Data with an Application to the Patents-R&D Relationship," Econometrica, Econometric Society, Econometric Society, vol. 52(4), pages 909-38, July.
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    Cited by:
    1. Behr, Patrick & Drexler, Alejandro & Gropp, Reint & Guettler, Andre, 2014. "Financial incentives and loan officer behavior: Multitasking and allocation of effort under an incomplete contract," SAFE Working Paper Series 62, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    2. Ha-Thu Nguyen, 2014. "Default Predictors in Credit Scoring - Evidence from France’s Retail Banking Institution," EconomiX Working Papers 2014-26, University of Paris West - Nanterre la Défense, EconomiX.

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