Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Faculty & Research
  • Faculty
  • Research
  • Featured Topics
  • Academic Units
  • …→
  • Harvard Business School→
  • Faculty & Research→
Publications
Publications
  • April 2015
  • Article
  • Journal of Finance

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

By: Shawn Cole, Martin Kanz and Leora Klapper
  • Format:Print
ShareBar

Abstract

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. We first show 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 credit officers. Second, we present 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.

Keywords

Banking; Management Processes; Credit Products; Experimental Economics; Risk Management; Motivation and Incentives; Management Practices and Processes; Financing and Loans; Banking Industry

Citation

Cole, Shawn, Martin Kanz, and Leora Klapper. "Incentivizing Calculated Risk-Taking: Evidence from an Experiment with Commercial Bank Loan Officers." Journal of Finance 70, no. 2 (April 2015): 537–575.
  • Find it at Harvard
  • Read Now

About The Author

Shawn A. Cole

Finance
→More Publications

More from the Authors

    • 2022
    • Faculty Research

    What Do Impact Investors Do Differently?

    By: Shawn A. Cole, Leslie Jeng, Josh Lerner, Natalia Rigol and Benjamin N. Roth
    • May 2022
    • Management Science

    Can Gambling Increase Savings? Empirical Evidence on Prize-Linked Savings Accounts

    By: Shawn A. Cole, Benjamin Iverson and Peter Tufano
    • October 2021 (Revised July 2022)
    • Faculty Research

    Engine No. 1: An Impact Investing Firm Engages with ExxonMobil

    By: Mark Kramer, Shawn Cole, Vikram S. Gandhi and T. Robert Zochowski
More from the Authors
  • What Do Impact Investors Do Differently? By: Shawn A. Cole, Leslie Jeng, Josh Lerner, Natalia Rigol and Benjamin N. Roth
  • Can Gambling Increase Savings? Empirical Evidence on Prize-Linked Savings Accounts By: Shawn A. Cole, Benjamin Iverson and Peter Tufano
  • Engine No. 1: An Impact Investing Firm Engages with ExxonMobil By: Mark Kramer, Shawn Cole, Vikram S. Gandhi and T. Robert Zochowski
ǁ
Campus Map
Harvard Business School
Soldiers Field
Boston, MA 02163
→Map & Directions
→More Contact Information
  • Make a Gift
  • Site Map
  • Jobs
  • Harvard University
  • Trademarks
  • Policies
  • Accessibility
  • Digital Accessibility
Copyright © President & Fellows of Harvard College