Incentivizing Calculated Risk-Taking: Evidence from an Experiment with Commercial Bank Loan Officers

64 Pages Posted: 28 Sep 2013

See all articles by Shawn Allen Cole

Shawn Allen Cole

Harvard Business School

Martin Kanz

World Bank; World Bank - Development Research Group (DECRG)

Leora F. Klapper

World Bank; World Bank - Development Research Group (DECRG)

Multiple version iconThere are 4 versions of this paper

Date Written: September 2013

Abstract

We use an experiment with commercial bank loan officers to test how performance based compensation affects risk-assessment and lending. High-powered incentives lead to greater screening effort and more profitable lending decisions. This effect, however, is muted by deferred compensation and limited liability, two standard features of loan officer incentive contracts. We find that career concerns and personality traits affect screening behavior, but show that the response to monetary incentives does not vary with traits such as risk-aversion, optimism or overconfidence. Finally, we present evidence that incentive contracts distort the assessment of credit risk, even among trained professionals with many years of experience. Loans evaluated under permissive incentives are rated significantly less risky than the same loans evaluated under pay-for-performance.

Suggested Citation

Cole, Shawn Allen and Kanz, Martin and Klapper, Leora F., Incentivizing Calculated Risk-Taking: Evidence from an Experiment with Commercial Bank Loan Officers (September 2013). NBER Working Paper No. w19472. Available at SSRN: https://ssrn.com/abstract=2332542

Shawn Allen Cole (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Martin Kanz

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

Leora F. Klapper

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States
202-473-8738 (Phone)

HOME PAGE: http://econ.worldbank.org/staff/lklapper

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
4
Abstract Views
581
PlumX Metrics