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

  • Author(s): ANDREW HERTZBERG, JOSE MARIA LIBERTI, DANIEL PARAVISINI
  • Published: May 07, 2010
  • Pages: 795-828
  • DOI: 10.1111/j.1540-6261.2010.01553.x

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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