Publications
Publications
- April 2015
- Journal of Finance
Incentivizing Calculated Risk-Taking: Evidence from an Experiment with Commercial Bank Loan Officers
By: Shawn Cole, Martin Kanz and Leora Klapper
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; Risk Management; 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.
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