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

See all articles by Daniel Paravisini

Daniel Paravisini

London School of Economics & Political Science (LSE)

Andrew Hertzberg

Federal Reserve Bank of Philadelphia

Jose Maria Liberti

Northwestern University - Kellogg School of Management; DePaul University

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2010

Abstract

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.

Suggested Citation

Paravisini, Daniel and Hertzberg, Andrew and Liberti, Jose Maria, Information and Incentives Inside the Firm: Evidence from Loan Officer Rotation (June 1, 2010). Journal of Finance, Vol. 65, No. 3, pp. 795-828, June 2010 , Available at SSRN: https://ssrn.com/abstract=1947011

Daniel Paravisini

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Andrew Hertzberg (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Jose Maria Liberti

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Jacobs 4203
Evanston, IL 60208
United States
(847) 491-5861 (Phone)
(847) 491-5719 (Fax)

HOME PAGE: http://www.kellogg.northwestern.edu/faculty/directory/liberti_jose.aspx

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States
(312) 362-8739 (Phone)
(312) 362-6566 (Fax)

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