Incentivizing Calculated Risk-Taking: Evidence from an Experiment with Commercial Bank Loan Officers
We use an experiment with commercial bank loan officers to test how performance based compensation affects risk-assessment and lending. High-powered incentives lead to greater screening effort and more profitable lending decisions. This effect, however, is muted by deferred compensation and limited liability, two standard features of loan officer incentive contracts. We find that career concerns and personality traits affect screening behavior, but show that the response to monetary incentives does not vary with traits such as risk-aversion, optimism or overconfidence. Finally, we present evidence that incentive contracts distort the assessment of credit risk, even among trained professionals with many years of experience. Loans evaluated under permissive incentives are rated significantly less risky than the same loans evaluated under pay-for-performance.
-
-
Copy CitationShawn Cole, Martin Kanz, and Leora Klapper, "Incentivizing Calculated Risk-Taking: Evidence from an Experiment with Commercial Bank Loan Officers," NBER Working Paper 19472 (2013), https://doi.org/10.3386/w19472.Download Citation
Published Versions
“Incentivizing Calculated Risk-Taking: Evidence from an Experiment with Commercial Bank Loan Officers” with Shawn Cole and Leora Klapper. Journal of Finance 70 (2): 537-575, April 2015. citation courtesy of 
Related
Topics
Programs
Working Groups
More from the NBER
In addition to working papers, the NBER disseminates affiliates’ latest findings through a range of free periodicals—the NBER Reporter, the NBER Digest, the Bulletin on Health, the Bulletin on the Economics of Alzheimer's, and the Bulletin on Entrepreneurship—as well as research spotlights, lectures, and panel videos.
