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The Impact of Incentives and Communication Costs on Information Production: Evidence from Bank Lending

Jun Qian, Philip E. Strahan and Zhishu Yang
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Jun Qian: Boston College
Philip E. Strahan: Boston College
Zhishu Yang: Tsinghua University

Working Papers from University of Pennsylvania, Wharton School, Weiss Center

Abstract: In 2002 and 2003, many Chinese banks implemented policy reforms that delegated lending decisions to and increased the accountability of individual loan officers. The policy change followed China's entrance into the WTO and offers a plausibly exogenous shock to loan officer incentives to produce information on borrowers. Using detailed loan-level data from a large, state-owned bank, we find that an internal rating on borrower's credit risk has a more pronounced effect, beyond observable 'hard' information of the borrower, on both price and non-price terms of loan contracts after the reform and becomes a better predictor of loan outcomes. We also show that when the loan officer and the branch president who approves the loan contract works together for a longer period of time, the rating has an incrementally stronger effect on loan contracts. Our results highlight how incentives and communication costs can affect the quality of information production.

JEL-codes: D80 G20 L20 (search for similar items in EconPapers)
Date: 2011-09
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