Incentivizing calculated risk-taking
Subtitle: evidence from an experiment with commercial bank loan officers
By: Shawn Cole, Martin Kanz, Leora Klapper
Contributors: Kanz, Martin; Klapper, Leora; Harvard Business School
Series: Working paper / Harvard Business School -- 13-002; Working paper (Harvard Business School) -- 13-002.
Publisher: Harvard Business School
Published: 2012
Place of publication: [Boston]
Language: eng
Number of pages: 67
Subjects: Bank loans; Loan officers; Risk assessment; Bonus system; Bonuses (Employee fringe benefits)
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.
Notes: "July 2012"-- Publisher's website.

Includes bibliographical references.