Financial Incentives and Loan Officer Behavior: Multitasking and Allocation of Effort under an Incomplete Contract

Updated version of "SAFE Working Paper No. 62"

38 Pages Posted: 15 Jul 2014 Last revised: 18 Oct 2017

Patrick Behr

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE)

Alejandro Drexler

Federal Reserve Bank of Chicago

Reint Gropp

Halle Institute for Economic Research

Andre Guettler

University of Ulm - Department of Mathematics and Economics; Halle Institute for Economic Research

Date Written: October 10, 2017

Abstract

We investigate the implications of providing loan officers with a non-linear compensation structure that rewards loan volume and penalizes poor performance. Using a unique data set provided by a large international commercial bank, we examine the three main activities that loan officers perform: loan prospecting, screening, and monitoring. We find that when loan officers are at risk of losing their bonuses, they increase prospecting and monitoring. In some specifications, screening also increases. We further show that loan officers adjust their behavior more towards the end of the month when bonus payments are approaching. These effects are more pronounced for loan officers with longer tenures at the bank. Overall, the evidence suggests that the contract is effective for stimulating overall greater effort to extend loans while maintaining loan quality.

Keywords: Loan officer, incentives, loan prospecting, screening, monitoring

JEL Classification: G21, J33

Suggested Citation

Behr, Patrick and Drexler, Alejandro and Gropp, Reint and Guettler, Andre, Financial Incentives and Loan Officer Behavior: Multitasking and Allocation of Effort under an Incomplete Contract (October 10, 2017). Updated version of "SAFE Working Paper No. 62". Available at SSRN: https://ssrn.com/abstract=2466294 or http://dx.doi.org/10.2139/ssrn.2466294

Patrick Behr

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE) ( email )

Brazil

Alejandro Drexler

Federal Reserve Bank of Chicago ( email )

230 S La salle St, Chicago
Austin, IL 60604
United States

Reint Gropp (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Andre Guettler

University of Ulm - Department of Mathematics and Economics ( email )

Helmholzstrasse
Ulm, D-89081
Germany

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

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