Target setting and Allocative Inefficiency in Lending: Evidence from Two Chinese Banks / Yiming Cao, Raymond Fisman, Hui Lin, Yongxiang Wang.

Format:

Book

Author/Creator:

Cao, Yiming.

Contributor:

National Bureau of Economic Research.

Fisman, Raymond.

Lin, Hui.

Wang, Yongxiang.

Series:

Working Paper Series (National Bureau of Economic Research) no. w24961.

NBER working paper series no. w24961

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Target setting and Allocative Inefficiency in Lending

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

We study the consequences of month-end lending incentives for Chinese bank managers. Using data from two banks, one state-owned and the other partially privatized, we show a clear increase in lending in the final days of each month, a result of both more loan issuance and higher value per loan. We estimate that daily end-of-month lending is 95 percent higher in the last 5 days of each month as a result of loan targets, with only a small amount plausibly attributable to shifting loans forward from the following month. End-of-month loans are 2.1 percentage points (more than 16 percent) more likely to be classified as bad in the years following issuance; a back-of-the-envelope calculation suggests that the incremental loans made in order to hit targets are 26 percent more likely to eventually turn bad. Our work highlights the distortionary effects of target-setting on capital allocation, in a context in which such concerns have risen to particular prominence in recent years.

Notes:

Print version record

August 2018.