Loan Prospecting and the Loss of Soft Information

Sumit Agarwal and Itzhak Ben-David

No 19945, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G01 G21 (search for similar items in EconPapers)
Date: 2014-02
New Economics Papers: this item is included in nep-ban, nep-cta, nep-exp and nep-hrm
Note: CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published as Sumit Agarwal & Itzhak Ben-David, 2018. "Loan Prospecting and the Loss of Soft Information," Journal of Financial Economics, .

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