Articlebronze2014

Incentivizing Calculated Risk‐Taking: Evidence from an Experiment with Commercial Bank Loan Officers

Shawn Allen Cole · Martin Kanz · Leora F. Klapper

133 citations0/0 files storedThe Journal of Finance

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Banking stability, regulation, efficiency Decision-Making and Behavioral Economics Experimental Behavioral Economics Studies

Abstract

ABSTRACT We conduct an experiment with commercial bank loan officers to test how performance compensation affects risk assessment and lending. High‐powered incentives lead to greater screening effort and more profitable lending decisions. This effect is muted, however, by deferred compensation and limited liability, two standard features of loan officer compensation contracts. We find that career concerns and personality traits affect loan officer behavior, but show that the response to incentives does not vary with traits such as risk‐aversion, optimism, or overconfidence. Finally, we present evidence that incentives distort the assessment of credit risk, even among professionals with many years of experience.

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References

1994Distinguishing optimism from neuroticism (and trait anxiety, self-mastery, and self-esteem): A reevaluation of the Life Orientation Test.2000Economics and Identity*1994The Benefits of Lending Relationships: Evidence from Small Business Data 1997Credit Cycles 1990Performance Pay and Top-Management Incentives 2003Managing with Style: The Effect of Managers on Firm Policies 2005CEO Overconfidence and Corporate Investment 1999The Provision of Incentives in Firms

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