Working Paper: NBER ID: w19945
Authors: Sumit Agarwal; Itzhak Bendavid
Abstract: We study a controlled experiment in which a bank’s loan officers were incentivized based on originated loan volume to encourage prospecting for new business. While treated loan officers did attract new applications, both extensive and intensive margins of loan origination expanded (+31% new loans; loan size +15%). We find that loan officers gave greater weight to hard information in approval decisions. Despite no change in the observable characteristics of approved loans, their default rate increased (+24%). Finally, the bank’s imputed credit-default model lost its predictive power. Overall, loan-prospecting incentives led to unfavorable soft information being overlooked in the origination process.
Keywords: Loan Prospecting; Soft Information; Hard Information; Lending Standards; Default Rates
JEL Codes: G01; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Loan prospecting incentives (G21) | Increase in number of new loans approved (G21) |
| Loan prospecting incentives (G21) | Increase in average loan size (G51) |
| Loan prospecting incentives (G21) | Increase in default rates (G33) |
| Increase in default rates (G33) | Compromised predictive power of bank's credit-default model (G33) |
| Loan officers' personal characteristics (G51) | Higher approval rates (G51) |
| Loan officers' personal characteristics (G51) | Larger loan amounts (G51) |