Working Paper: CEPR ID: DP6317
Authors: Mike Felgenhauer; Hans Peter Grüner
Abstract: We study how banks should protect their credit departments against the external influence from potential borrowers. We analyze four mechanisms that are widespread in practice: a credit board with unanimity or simple majority, a hierarchy and an advisory system. A bank faces a trade-off between the quality of information aggregation and the effectiveness of barriers against external influence. We provide a ranking of the different schemes. Some of them are equivalent even though the credit managers' decision power differs. In large credit decisions, banks should sacrifice on the quality of information aggregation in order to better protect the decision making process from outside influence.
Keywords: Hierarchies; Lobbying; Voting Rules
JEL Codes: D73; G32; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bank's optimal organizational structure (G21) | effectiveness of safety nets against lobbying by borrowers (G28) |
| absence of a safety net (I38) | harmful credit decisions (G51) |
| implementing a hierarchy or advisory system or credit board (G21) | improvement in decision-making (D91) |
| credit board with unanimity and hierarchy (D70) | worse than credit board with simple majority and advisory system (D72) |
| bank should prioritize decision-making structures (G21) | enhanced protection from lobbying (K16) |