Premium
Incentivizing Calculated Risk‐Taking: Evidence from an Experiment with Commercial Bank Loan Officers
Author(s) -
COLE SHAWN,
KANZ MARTIN,
KLAPPER LEORA
Publication year - 2015
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12233
Subject(s) - loan , overconfidence effect , incentive , business , compensation (psychology) , actuarial science , officer , risk aversion (psychology) , affect (linguistics) , liability , accounting , finance , economics , psychology , microeconomics , expected utility hypothesis , social psychology , financial economics , communication , political science , law
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.