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Target setting and Allocative Inefficiency in Lending: Evidence from Two Chinese Banks

Author

Listed:
  • Yiming Cao

    () (Boston University)

  • Raymond Fisman

    () (Boston University and NBER)

  • Hui Lin

    () (Nanjing University)

  • Yongxiang Wang

    () (University of Southern California)

Abstract

We study the consequences of month-end lending incentives for Chinese bank managers. Using data from two banks, one state-owned and the other partially privatized, we show a clear increase in lending in the final days of each month, resulting from both more loan issuance and higher value per loan. We estimate that daily lending is 92 percent higher in the last 5 days of each month as a result of loan targets, with only a small amount plausibly attributable to shifting loans forward from the following month. End-of-month loans are 1.6 percentage points (12 percent) more likely to be classified as bad in the years following issuance relative to mid-month loans. Our work highlights the distortionary effects of target-setting on capital allocation, in a context in which such concerns have risen to particular prominence in recent years.

Suggested Citation

  • Yiming Cao & Raymond Fisman & Hui Lin & Yongxiang Wang, 2018. "Target setting and Allocative Inefficiency in Lending: Evidence from Two Chinese Banks," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-321, Boston University - Department of Economics.
  • Handle: RePEc:bos:iedwpr:dp-321
    as

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    File URL: http://www.bu.edu/econ/files/2019/05/Creditboom_rf13.pdf
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    References listed on IDEAS

    as
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    3. Paul Oyer, 1998. "Fiscal Year Ends and Nonlinear Incentive Contracts: The Effect on Business Seasonality," The Quarterly Journal of Economics, Oxford University Press, vol. 113(1), pages 149-185.
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    5. Propper, Carol & Sutton, Matt & Whitnall, Carolyn & Windmeijer, Frank, 2010. "Incentives and targets in hospital care: Evidence from a natural experiment," Journal of Public Economics, Elsevier, vol. 94(3-4), pages 318-335, April.
    6. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    7. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Capital allocation; incentive design; Chinese banking;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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