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Incentivizing calculated risk-taking :evidence from an experiment with commercial bank loan officers
 
Author:Cole, Shawn; Kanz, Martin; Klapper, Leora; Collection Title:Policy Research working paper ; no. WPS 6146Impact evaluation series ; no. 64
Country:World; Date Stored:2012/07/23
Document Date:2012/07/01Document Type:Policy Research Working Paper
Language:EnglishRegion:The World Region
Report Number:WPS6146SubTopics:Bankruptcy and Resolution of Financial Distress; Access to Finance; Debt Markets; Banks & Banking Reform; Microfinance
Volume No:1 of 1  

Summary: This paper uses a series of experiments with commercial bank loan officers to test the effect of performance incentives on risk-assessment and lending decisions. The paper first shows that, while high-powered incentives lead to greater screening effort and more profitable lending, their power is muted by both deferred compensation and the limited liability typically enjoyed by loan officers. Second, the paper presents direct evidence that incentive contracts distort judgment and beliefs, even among trained professionals with many years of experience. Loans evaluated under more permissive incentive schemes are rated significantly less risky than the same loans evaluated under pay-for-performance.

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