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Financial Incentives and Loan Officer Behavior: Multitasking and Allocation of Effort under an Incomplete Contract

Published online by Cambridge University Press:  30 April 2019

Patrick Behr ,
Alejandro Drexler ,
Reint Gropp  and
Andre Guettler Open the ORCID record for Andre Guettler [Opens in a new window]
Patrick Behr
Affiliation:
Behr, patrick.behr@fgv.br, EBAPE, Getulio Vargas Foundation
Alejandro Drexler
Affiliation:
Drexler, alejandro.h.drexler@chi.frb.org, Federal Reserve Bank of Chicago
Reint Gropp
Affiliation:
Gropp, reint.gropp@iwh-halle.de, Halle Institute for Economic Research and University of Magdeburg
Andre Guettler*
Affiliation:
Guettler, andre.guettler@uni-ulm.de, University of Ulm and Halle Institute for Econmic Research
*
Guettler (corresponding author), andre.guettler@uni-ulm.de
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Abstract

We investigate the implications of providing loan officers with a nonlinear compensation structure that rewards loan volume and penalizes poor performance. Using a unique data set provided by a large international commercial bank, we examine the main activities that loan officers perform: loan prospecting, screening, and monitoring. We find that when loan officers are at risk of losing their bonuses, they increase prospecting and monitoring. We further show that loan officers adjust their behavior more toward the end of the month when bonus payments are approaching. These effects are more pronounced for loan officers with longer tenures at the bank.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 4 , June 2020 , pp. 1243 - 1267
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

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Footnotes

We thank an anonymous referee, Phil Dybvig, Jarrad Harford (the editor), Mrdjan Mladjan, Lars Norden, Klaus Schaeck, and Jerome Taillard; participants at the 2015 annual meetings of the American Finance Association, the European Finance Association, and the Swiss Society for Financial Market Research; and seminar participants at the Annual Meeting on Risk, Financial Stability, and Banking of the Brazilian Central Bank, Bank of Canada, Brazilian School of Public and Business Administration, Federal Reserve Bank San Francisco, Frankfurt School of Finance and Management, Fudan University, PUC Rio de Janeiro, and the World Bank for their comments. Part of this research was completed while Gropp was visiting the University of Amsterdam, the hospitality of which is greatly appreciated. A previous version of the article was entitled “Financial Incentives and Loan Officer Behavior.” The views expressed here do not reflect official positions of the Federal Reserve Bank of Chicago.

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