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

Yiming Cao, Raymond Fisman, Hui Lin and Yongxiang Wang

No 24961, NBER Working Papers from National Bureau of Economic Research, Inc

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, a result of both more loan issuance and higher value per loan. We estimate that daily end-of-month lending is 95 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 2.1 percentage points (more than 16 percent) more likely to be classified as bad in the years following issuance; a back-of-the-envelope calculation suggests that the incremental loans made in order to hit targets are 26 percent more likely to eventually turn bad. 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.

JEL-codes: G21 M52 (search for similar items in EconPapers)
Date: 2018-08
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-hrm and nep-tra
Note: CF DEV LS POL
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Working Paper: Target setting and Allocative Inefficiency in Lending: Evidence from Two Chinese Banks (2018)
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