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Loan Prospecting and the Loss of Soft Information

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  • Sumit Agarwal
  • Itzhak Ben-David

Abstract

We study a controlled experiment in which a bank’s loan officers were incentivized based on originated loan volume to encourage prospecting for new business. While treated loan officers did attract new applications, both extensive and intensive margins of loan origination expanded (+31% new loans; loan size +15%). We find that loan officers gave greater weight to hard information in approval decisions. Despite no change in the observable characteristics of approved loans, their default rate increased (+24%). Finally, the bank’s imputed credit-default model lost its predictive power. Overall, loan-prospecting incentives led to unfavorable soft information being overlooked in the origination process.

Suggested Citation

  • Sumit Agarwal & Itzhak Ben-David, 2014. "Loan Prospecting and the Loss of Soft Information," NBER Working Papers 19945, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:19945
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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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