Cole, ShawnKanz, MartinKlapper, Leora2012-12-212012-12-212012-07https://hdl.handle.net/10986/12002This paper uses a series of experiments with commercial bank loan officers to test the effect of performance incentives on risk-assessment and lending decisions. The paper first shows 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 loan officers. Second, the paper presents 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.en-USCC BY 3.0 IGOACCOUNTABILITYAGENCY PROBLEMAGENCY PROBLEMSAPPROVAL PROCESSASSET PRICESASSET QUALITYBALANCE SHEETBANK CREDITBANK LENDINGBANK LOAN OFFICERSBANK POLICYBORROWERBRANCHBUSINESS EXPERIENCEBUSINESS OWNERSBUSINESS RISKCAPITAL ALLOCATIONCAPITAL LOANSCASE OF DEFAULTCASH PAYMENTSCHECKSCLAIMANTCOLLATERALCOMMERCIAL BANKCOMMERCIAL BANK LOANCOMMERCIAL BANKSCOMMERCIAL LENDERCOMMERCIAL LENDINGCOMMERCIAL LOANCOMMERCIAL PAPERCONFLICT OF INTERESTCONSUMER LENDINGCORPORATE FINANCECOST OF CAPITALCREDIT APPLICATIONCREDIT APPLICATIONSCREDIT AVAILABILITYCREDIT BUREAUCREDIT INFORMATIONCREDIT MARKETSCREDIT OFFICERCREDIT OFFICERSCREDIT QUALITYCREDIT REPORTSCREDIT RISKCREDIT SCORECREDIT SCORINGCREDIT SCORING MODELSCREDIT-SCORINGDEBTDEBT CONTRACTSDEBT SERVICEDECENTRALIZATIONDEFAULT RATESDEFAULT RISKDEFAULTSDEFERRED PAYMENTDEMOGRAPHIC CHARACTERISTICDEMOGRAPHIC CHARACTERISTICSDEPOSITDEPOSIT INSURANCEDISCOUNT RATEDISCOUNT RATESDISPOSITIONSDUMMY VARIABLEEMERGING CREDITEMERGING MARKETSEMPLOYEEEMPLOYERSENFORCEABILITYENFORCEABILITY OF DEBT CONTRACTSENTREPRENEURENTREPRENEURIAL ACTIVITIESENTREPRENEURSENTREPRENEURSHIPEQUALITYEQUALITY OF DISTRIBUTIONSEXCLUSIONEXPENDITUREEXPENDITURESFEDERAL RESERVEFEDERAL RESERVE BANKFEDERAL RESERVE BANK OF NEW YORKFINANCIAL ASSISTANCEFINANCIAL CRISISFINANCIAL DEVELOPMENTFINANCIAL INNOVATIONFINANCIAL INSTITUTIONFINANCIAL INSTITUTIONSFINANCIAL INTERMEDIATIONFINANCIAL MARKETSFINANCIAL PRODUCTSFINANCIAL RISKFINANCIAL STUDIESFIRMSFIXED COSTFOREIGN LENDERSFORMAL BORROWINGFORMAL FINANCIAL MARKETSFUTURE ASSETGENDERGOVERNMENT OWNERSHIPHOUSEHOLD INCOMEIMPLICIT GUARANTEESINCENTIVE COMPATIBILITY CONSTRAINTINCENTIVE CONSTRAINTSINCENTIVES FOR REPAYMENTINCOME STATEMENTINCOME STATEMENTSINDIVIDUAL LOANINEQUALITYINFORMATION ASYMMETRIESINSTALLMENTINSTALLMENTSINSURANCEINTEREST RATEINTEREST RATESINTERNATIONAL BANKINVENTORYJUDGMENTLENDERLENDING DECISIONLENDING DECISIONSLEVELS OF DEBTLIMITED LIABILITYLINES OF CREDITLOAN APPLICATIONLOAN APPLICATIONSLOAN APPROVALLOAN APPROVALSLOAN CHARACTERISTICSLOAN CLIENTSLOAN DEFAULTSLOAN OFFICERLOAN OFFICERSLOAN PERFORMANCELOAN PORTFOLIOLOAN QUALITYLOAN REPAYMENTLOAN SIZELOAN UNDERWRITINGMEDIUM ENTERPRISESMORAL HAZARDNEGOTIATIONNET INTEREST MARGINNET PROFITNON-PERFORMING LOANNON-PERFORMING LOANSOPAQUE SMALL BUSINESSESOPTIMAL CONTRACTOUTSTANDING LOANSPAYOFFSPENALTIESPENALTYPERSONAL EXPENSESPOLITICAL ECONOMYPREDICTIVE CREDIT SCORINGPRESENT VALUEPRIVATE SECTOR BANKSPROBABILITY OF DEFAULTPRODUCTIVITYPROFITABILITYPROFITS PER LOANPUBLIC SECTOR BANKPUBLIC SECTOR COMMERCIAL BANKSREMEDYREPAYMENTREPAYMENT HISTORYREPAYMENTSRESIDUAL CLAIMANTRETURNRETURNSRISK AVERSIONRISK EVALUATIONRISK MANAGEMENTRISK TAKINGROLE OF BANKSALARYSHAREHOLDERSSMALL BUSINESSSMALL BUSINESS CREDITSMALL BUSINESS LENDINGSMALL BUSINESS LOANSMALL BUSINESS LOANSSMALL FIRMSMALL FIRM FINANCESMALL-BUSINESSSMALL-BUSINESS LOANSSTART-UPSTATE BANKSTAXUNDERLYING ASSETVALUATIONSWAGESWILLINGNESS TO PAYWORKING CAPITALWorld Bank10.1596/1813-9450-6146