NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Loan Prospecting and the Loss of Soft Information

Sumit Agarwal, Itzhak Ben-David

NBER Working Paper No. 19945
Issued in February 2014, Revised in July 2017
NBER Program(s):Corporate Finance

We study a controlled experiment in which a bank’s loan officers were incentivized based on originated loan volume to encourage prospecting for new business. While treated loan officers did attract new applications, both extensive and intensive margins of loan origination expanded (+31% new loans; loan size +15%). We find that loan officers gave greater weight to hard information in approval decisions. Despite no change in the observable characteristics of approved loans, their default rate increased (+24%). Finally, the bank’s imputed credit-default model lost its predictive power. Overall, loan-prospecting incentives led to unfavorable soft information being overlooked in the origination process.

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Document Object Identifier (DOI): 10.3386/w19945

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