Incentivizing calculated risk-taking
evidence from an experiment with commercial bank loan officers
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Author
Contributions
- Kanz, Martin - Contributor
- Klapper, Leora - Contributor
- Harvard Business School - Contributor
Publication
2012 - Harvard Business School, Boston, Massachusetts
Language
English
Word Count
16,750 words, Guess
Page Count
67 pages
Identifiers
- OCLC Control Number808813914
- Open LibraryOL43973361M
Description
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.
Subjects
Series Statement
- Working paper / Harvard Business School -- 13-002
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