Work

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

Year: 2014

Type: article

Abstract: ABSTRACT We conduct an experiment with commercial bank loan officers to test how performance compensation affects risk assessment and lending. High‐powered incentives lead to greater screening effort and more profitable lending decisions. This effect is muted, however, by deferred compensation and limited liability, two standard features of loan officer compensation contracts. We find that career concerns and personality traits affect loan officer behavior, but show that the response to incentives does not vary with traits such as risk‐aversion, optimism, or overconfidence. Finally, we present evidence that incentives distort the assessment of credit risk, even among professionals with many years of experience.

Source: The Journal of Finance

DOI: 10.1111/jofi.12233

Authors: SHAWN COLE, MARTIN KANZ, LEORA KLAPPER

Institutions: National Bureau of Economic Research, World Bank, Harvard University, University of Chicago, Indian Institute of Management Bangalore, University of Virginia

Language: English

Topic: Banking stability, regulation, efficiency

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: bronze

Funder: Ewing Marion Kauffman Foundation

OpenAlex ID: W2616248647

FWCI: 18.3

Cites: 43

Cited by: 133

Related to: 10