Incentivizing Calculated Risk-Taking : Evidence from an Experiment with Commercial Bank Loan Officers
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 ef...
| Main Authors: | , , |
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| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2012
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2012/07/16531326/incentivizing-calculated-risk-taking-evidence-experiment-commercial-bank-loan-officers http://hdl.handle.net/10986/12002 |
| Summary: | 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. |
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