Working Paper: NBER ID: w19051
Authors: Tobias Berg; Manju Puri; Jorg Rocholl
Abstract: Poor loan quality is often attributed to loan officers exercising poor judgment. A potential solution is to base loans on hard information alone. However, we find other consequences of bypassing discretion stemming from loan officer incentives and limits of hard information verifiability. Using unique data where loans are based on hard information, and loan officers are volume-incentivized, we find loan officers increasingly use multiple trials to move loans over the cut-off, both in a regression-discontinuity design and when the cut-off changes. Additional trials positively predict default suggesting strategic manipulation of information even when loans are based on hard information alone.
Keywords: Loan Officer Incentives; Hard Information; Default Rates; Credit Scoring
JEL Codes: G01; G2; G21; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Initial scoring trial does not meet cutoff rating (C52) | Number of scoring trials attempted (C99) |
| Loan officer incentives (G21) | Number of scoring trials attempted (C99) |
| Number of scoring trials (C90) | Default rates (E43) |
| Time taken between scoring trials (C41) | Default rates (E43) |
| Loan officer behavior (manipulation of information) (G21) | Loan outcomes (G51) |