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

Yiming Cao (), Raymond Fisman (), Hui Lin () and Yongxiang Wang ()
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Yiming Cao: Boston University
Raymond Fisman: Boston University and NBER
Hui Lin: Nanjing University
Yongxiang Wang: University of Southern California

No dp-321, Boston University - Department of Economics - The Institute for Economic Development Working Papers Series from Boston University - Department of Economics

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.

Keywords: Capital allocation; incentive design; Chinese banking (search for similar items in EconPapers)
JEL-codes: G21 M52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-hrm and nep-tra
Date: 2018-10
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