Loan Officer Incentives and the Limits of Hard Information

41 Pages Posted: 18 May 2013

See all articles by Tobias Berg

Tobias Berg

Frankfurt School of Finance & Management

Manju Puri

Duke University - Fuqua School of Business; NBER; FDIC

Jörg Rocholl

ESMT European School of Management and Technology

Multiple version iconThere are 2 versions of this paper

Date Written: May 2013

Abstract

Poor loan quality is often attributed to loan officers exercising poor judgment. A potential solution is to base loans on hard information alone. However, we find other consequences of bypassing discretion stemming from loan officer incentives and limits of hard information verifiability. Using unique data where loans are based on hard information, and loan officers are volume-incentivized, we find loan officers increasingly use multiple trials to move loans over the cut-off, both in a regression-discontinuity design and when the cut-off changes. Additional trials positively predict default suggesting strategic manipulation of information even when loans are based on hard information alone.

Suggested Citation

Berg, Tobias and Puri, Manju and Rocholl, Joerg, Loan Officer Incentives and the Limits of Hard Information (May 2013). NBER Working Paper No. w19051. Available at SSRN: https://ssrn.com/abstract=2266718

Tobias Berg (Contact Author)

Frankfurt School of Finance & Management ( email )

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

Manju Puri

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Box 90120
Durham, NC 27708-0120
United States
919-660-7657 (Phone)

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

FDIC ( email )

550 17th Street NW
Washington, DC 20429
United States

Joerg Rocholl

ESMT European School of Management and Technology ( email )

Schlossplatz 1
Berlin
Germany

HOME PAGE: http://www.esmt.org/en/159244

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