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Incentivizing Calculated Risk-Taking: Evidence from an Experiment with Commercial Bank Loan Officers

Shawn Cole, Martin Kanz () and Leora Klapper ()

No 13-002, Harvard Business School Working Papers from Harvard Business School

Abstract: This paper uses a series of experiments with commercial bank loan officers to test the effect of performance incentives on risk-assessment and lending decisions. We first show that, while high-powered incentives lead to greater screening effort and more profitable lending, their power is muted by both deferred compensation and the limited liability typically enjoyed by credit officers. Second, we present direct evidence that incentive contracts distort judgment and beliefs, even among trained professionals with many years of experience. Loans evaluated under more permissive incentive schemes are rated significantly less risky than the same loans evaluated under pay-for-performance.

Keywords: loan officer incentives; banking; emerging markets (search for similar items in EconPapers)
JEL-codes: D03 G21 J22 J33 L2 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cta, nep-exp and nep-hrm
Date: 2012-07
References: View references in EconPapers View complete reference list from CitEc
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http://www.hbs.edu/research/pdf/13-002.pdf (application/pdf)

Related works:
Journal Article: Incentivizing Calculated Risk-Taking: Evidence from an Experiment with Commercial Bank Loan Officers (2015) Downloads
Working Paper: Incentivizing Calculated Risk-Taking: Evidence from an Experiment with Commercial Bank Loan Officers (2013) Downloads
Working Paper: Incentivizing calculated risk-taking:evidence from an experiment with commercial bank loan officers (2012) Downloads
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