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Loan origination under soft- and hard-information lending

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  • Inderst, Roman

Abstract

This paper presents a novel model of the lending process that takes into account that loan officers must spend time and effort to originate new loans. Besides generating predictions on loan officers’ compensation and its interaction with the loan review process, the model sheds light on why competition could lead to excessively low lending standards. We also show how more intense competition may fasten the adoption of credit scoring. More generally, hard-information lending techniques such as credit scoring allow to give loan officers high-powered incentives without compromising the integrity and quality of the loan approval process. The model is finally applied to study the implications of loan sales on the adopted lending process and lending standard.

Suggested Citation

  • Inderst, Roman, 2009. "Loan origination under soft- and hard-information lending," IMFS Working Paper Series 27, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    • Handle: RePEc:zbw:imfswp:27
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    Cited by:

    1. Roman Inderst & Manuel Klein, 2007. "Innovation, endogenous overinvestment, and incentive pay," RAND Journal of Economics, RAND Corporation, vol. 38(4), pages 881-904, December.
    2. Bruce I. Carlin & Simon Gervais, 2009. "Legal Protection in Retail Financial Markets," NBER Working Papers 14972, National Bureau of Economic Research, Inc.
    3. Inderst, Roman, 2010. "Misselling (financial) products: The limits for internal compliance," Economics Letters, Elsevier, vol. 106(1), pages 35-37, January.
    4. Roman Inderst, 2008. "'Irresponsible Lending' With A Better Informed Lender," Economic Journal, Royal Economic Society, vol. 118(532), pages 1499-1519, October.
    5. Roman Inderst & Holger M. Mueller & Felix Münnich, 2006. "Financing a Portfolio of Projects," The Review of Financial Studies, Society for Financial Studies, vol. 20(4), pages 1289-1325.
    6. Andrea Bellucci & Alexander Borisov & Alberto Zazzaro, 2011. "Do Male and Female Loan Officers Differ in Small Business Lending? A Review of the Literature," Contributions to Economics, in: Giorgio Calcagnini & Ilario Favaretto (ed.), The Economics of Small Businesses, chapter 0, pages 195-219, Springer.
    7. Roman Inderst & Holger M. Mueller, 2010. "CEO Replacement Under Private Information," The Review of Financial Studies, Society for Financial Studies, vol. 23(8), pages 2935-2969, August.
    8. Inderst, Roman & Mueller, Holger M., 2009. "Early-stage financing and firm growth in new industries," Journal of Financial Economics, Elsevier, vol. 93(2), pages 276-291, August.
    9. Inderst, Roman & Mueller, Holger M., 2008. "Bank capital structure and credit decisions," Journal of Financial Intermediation, Elsevier, vol. 17(3), pages 295-314, July.

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