Information and Incentives Inside the Firm: Evidence from Loan Officer Rotation
Journal of Finance, Vol. 65, No. 3, pp. 795-828, June 2010
57 Pages Posted: 22 Oct 2011 Last revised: 25 Oct 2011
Date Written: June 1, 2010
We present evidence that reassigning tasks among agents can alleviate moral hazard in communication. A rotation policy that routinely reassigns loan officers to borrowers of a commercial bank affects the officers' reporting behavior. When an officer anticipates rotation, reports are more accurate and contain more bad news about the borrower's repayment prospects. As a result, the rotation policy makes bank lending decisions more sensitive to officer reports. The threat of rotation improves communication because self-reporting bad news has a smaller negative effect on an officer's career prospects than bad news exposed by a successor.
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