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Incentivizing Calculated Risk-Taking : Evidence from an Experiment with Commercial Bank Loan Officers / Shawn Cole
World Bank Open Knowledge Repository (formerly "World Bank E-Library Publications") Available online
View online- Format:
- Book
- Government document
- Author/Creator:
- Cole, Shawn
- Series:
- Policy research working papers.
- World Bank e-Library.
- Language:
- English
- Subjects (All):
- Access to Finance.
- Banking.
- Bankruptcy and Resolution of Financial Distress.
- Banks & Banking Reform.
- Debt Markets.
- Emerging markets.
- Finance and Financial Sector Development.
- Loan officer incentives.
- Microfinance.
- Private Sector Development.
- Local Subjects:
- Access to Finance.
- Banking.
- Bankruptcy and Resolution of Financial Distress.
- Banks & Banking Reform.
- Debt Markets.
- Emerging markets.
- Finance and Financial Sector Development.
- Loan officer incentives.
- Microfinance.
- Private Sector Development.
- Physical Description:
- 1 online resource (68 pages)
- Other Title:
- Incentivizing Calculated Risk-Taking
- Place of Publication:
- Washington, D.C., The World Bank, 2012
- System Details:
- data file
- Summary:
- 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. 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.
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