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. The paper first shows 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 loan officers. Second, the paper presents 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 The World Bank in its series Policy Research Working Paper Series with number 6146.
Date of creation: 01 Jul 2012
Date of revision:
Debt Markets; Access to Finance; Bankruptcy and Resolution of Financial Distress; Banks&Banking Reform; Microfinance;
Other versions of this item:
- 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.
- Shawn Cole & Martin Kanz & Leora Klapper, 2012. "Incentivizing Calculated Risk-Taking: Evidence from an Experiment with Commercial Bank Loan Officers," Harvard Business School Working Papers 13-002, Harvard Business School.
- D03 - Microeconomics - - General - - - Behavioral Economics; 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-2012-07-29 (All new papers)
- NEP-BAN-2012-07-29 (Banking)
- NEP-CTA-2012-07-29 (Contract Theory & Applications)
- NEP-EXP-2012-07-29 (Experimental Economics)
- NEP-HRM-2012-07-29 (Human Capital & Human Resource Management)
- NEP-MFD-2012-07-29 (Microfinance)
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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"Sex and Credit: Is There a Gender Bias in Lending?,"
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