Information and incentives inside the firm: Evidence from loan officer rotation

Andrew Hertzberg*, Jose Maria Liberti, Daniel Paravisini

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

83 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)795-828
Number of pages34
JournalJournal of Finance
Volume65
Issue number3
DOIs
StatePublished - Jun 1 2010

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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