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Do Loan Officers' Incentives Lead to Lax Lending Standards?Sumit AgarwalNational University of Singapore Itzhak Ben-DavidOhio State University - Fisher College of Business, Finance Department October 08, 2012 Fisher College of Business Working Paper No. 2012-03-007 Charles A. Dice Center Working Paper No. 2012-7 Abstract: We study a controlled corporate experiment in which loan officers was altered from fixed salary to volume-based pay. The incentives increased aggressiveness of origination: higher origination rates ( 31%), loan sizes ( 15%), and default rate ( 28%). The effects are partly driven by moral hazard: approval decision is driven by loan officers’ discretion;however, default is uncorrelated with discretion. Default rate is higher when discretion is used to accept loans and when loan terms are unfoundedly aggressive. End-of-month approvals (i.e., larger marginal bonus) are more likely to default. Marginal originated loans have a negative net present value.
Number of Pages in PDF File: 55 Keywords: loan officers, default, housing bubble, financial crisis JEL Classification: G01, G21 working papers seriesDate posted: April 26, 2012 ; Last revised: October 8, 2012Suggested CitationContact Information
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