Cole, Shawn
Incentivizing Calculated Risk-Taking Evidence from an Experiment with Commercial Bank Loan Officers / Shawn Cole [electronic resource] : Shawn Cole - Washington, D.C., The World Bank, 2012 - 1 online resource (68 p.) - Policy research working papers. World Bank e-Library. .
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. The paper first shows 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 loan officers. Second, the paper presents 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.
10.1596/1813-9450-6146
Access to Finance
Banking
Bankruptcy and Resolution of Financial Distress
Banks & Banking Reform
Debt Markets
Emerging markets
Finance and Financial Sector Development
Loan officer incentives
Microfinance
Private Sector Development
Incentivizing Calculated Risk-Taking Evidence from an Experiment with Commercial Bank Loan Officers / Shawn Cole [electronic resource] : Shawn Cole - Washington, D.C., The World Bank, 2012 - 1 online resource (68 p.) - Policy research working papers. World Bank e-Library. .
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. The paper first shows 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 loan officers. Second, the paper presents 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.
10.1596/1813-9450-6146
Access to Finance
Banking
Bankruptcy and Resolution of Financial Distress
Banks & Banking Reform
Debt Markets
Emerging markets
Finance and Financial Sector Development
Loan officer incentives
Microfinance
Private Sector Development