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Information and Incentives Inside the Firm: Evidence from Loan Officer Rotation

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  • ANDREW HERTZBERG
  • JOSE MARIA LIBERTI
  • DANIEL PARAVISINI

Abstract

We present evidence that reassigning tasks among agents can alleviate moral hazard in communication. A rotation policy that routinely reassigns loan officers to borrowers of a commercial bank affects the officers' reporting behavior. When an officer anticipates rotation, reports are more accurate and contain more bad news about the borrower's repayment prospects. As a result, the rotation policy makes bank lending decisions more sensitive to officer reports. The threat of rotation improves communication because self‐reporting bad news has a smaller negative effect on an officer's career prospects than bad news exposed by a successor.

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  • Andrew Hertzberg & Jose Maria Liberti & Daniel Paravisini, 2010. "Information and Incentives Inside the Firm: Evidence from Loan Officer Rotation," Journal of Finance, American Finance Association, vol. 65(3), pages 795-828, June.
    • Handle: RePEc:bla:jfinan:v:65:y:2010:i:3:p:795-828
    DOI: 10.1111/j.1540-6261.2010.01553.x
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