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- Title
Loan Prospecting.
- Authors
Heider, Florian; Inderst, Roman
- Abstract
We analyze corporate lending when loan officers must be incentivized to prospect for loans and to transmit the soft information they obtain in that process. We explore how this multi-task agency problem shapes loan officers' compensation, banks' use of soft information in credit approval, and their lending standards. When competition intensifies, prospecting for loans becomes more important and banks' internal agency problems worsen. In response to more competition, banks lower lending standards, may choose to disregard soft and use only hard information in their credit approval, and in that case reduce loan officers to salespeople with steep, volume-based compensation. Our model generates “excessive lending” as banks' optimal response to an internal agency problem.
- Subjects
COMMERCIAL loan officers; LABOR incentives; COMPETITION in the banking industry; LOAN officers; COMMERCIAL loans; MONEYLENDERS; CORRUPT practices in the banking industry; LOANS; CREDIT ratings; WAGES
- Publication
Review of Financial Studies, 2012, Vol 25, Issue 8, p2381
- ISSN
0893-9454
- Publication type
Article
- DOI
10.1093/rfs/hhs051