Charles A. Dice Center Working Paper No. 2012-7
57 Pages Posted: 26 Apr 2012 Last revised: 16 Jul 2017
Date Written: January 2017
We study a controlled experiment in which a bank’s loan officers were incentivized based on originated loan volume to encourage prospecting for new business. While treated loan officers did attract new applications, both extensive and intensive margins of loan origination expanded ( 31% new loans; loan size 15%). We find that loan officers gave greater weight to hard information in approval decisions. Despite no change in the observable characteristics of approved loans, their default rate increased ( 24%). Finally, the bank’s imputed credit-default model lost its predictive power. Overall, loan-prospecting incentives led to unfavorable soft information being overlooked in the origination process.
Keywords: loan officers, loan prospecting, information production, banking, soft information, big data, credit default model
JEL Classification: G01, G21
Suggested Citation: Suggested Citation
Agarwal, Sumit and Ben-David, Itzhak, Loan Prospecting and the Loss of Soft Information (January 2017). Journal of Financial Economics (JFE), Forthcoming; Fisher College of Business Working Paper No. 2012-03-07; Charles A. Dice Center Working Paper No. 2012-7. Available at SSRN: https://ssrn.com/abstract=2046696 or http://dx.doi.org/10.2139/ssrn.2046696