Loan prospecting and the loss of soft information

Sumit Agarwal and Itzhak Ben-David

Journal of Financial Economics, 2018, vol. 129, issue 3, 608-628

Abstract: We study a controlled experiment in which a bank's loan officers were incentivized based on originated loan volume to encourage prospecting for new business. While treated loan officers did attract new applications, both extensive and intensive margins of loan origination expanded (+ 31% new loans; loan size + 15%). We find that loan officers gave greater weight to hard information in approval decisions. Despite no change in the observable characteristics of approved loans, their default rate increased (+ 24%). Finally, the bank's imputed credit default model lost its predictive power. Overall, loan prospecting incentives led to unfavorable soft information being overlooked in the origination process.

Keywords: Loan officers; Loan prospecting; Information production; Banking; Soft information; Big data; Credit default model (search for similar items in EconPapers)
JEL-codes: G01 G21 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (58)

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Related works:
Working Paper: Loan Prospecting and the Loss of Soft Information (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:129:y:2018:i:3:p:608-628

DOI: 10.1016/j.jfineco.2018.05.003

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