Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/70507
Authors: 
Agarwal, Sumit
Wang, Faye H.
Year of Publication: 
2009
Series/Report no.: 
Working Paper, Federal Reserve Bank of Chicago 2009-08
Abstract: 
Incentive provision is a central question in modern economic theory. During the run up to the financial crisis, many banks attempted to encourage loan underwriting by giving out incentive packages to loan officers. Using a unique data set on small business loan officer compensation from a major commercial bank, we test the model's predictions that incentive compensation increases loan origination, but may induce the loan officers to book more risky loans. We find that the incentive package amounts to a 47% increase in loan approval rate, and a 24% increase in default rate. Overall, we find that the bank loses money by switching to incentive pay. We further test the effects of incentive pay on other loan characteristics using a multivariate difference-in-difference analysis.
Subjects: 
Incentive Compensation
Small Business Lending
Loan Officers
Piece Rate and Salaries
JEL: 
D3
G2
J3
Document Type: 
Working Paper

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