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

Daniel Paravisini, Andrew Hertzberg, Jose Maria Liberti

Publication type: Journal article

Research Archive Topic: Corporate Finance, Organizations

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.

This is the pre-peer-reviewed version of the following article: Paravisini, Daniel, Andrew Hertzberg, and Jose Maria Liberti. "Information and Incentives Inside the Firm: Evidence from Loan Officer Rotation." Journal of Finance 65, no. 3 (June 2010): 795-828, which has been published in final form at http://dx.doi.org/10.1111/j.1540-6261.2010.01553.x.
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Citation

Paravisini, Daniel, Andrew Hertzberg, and Jose Maria Liberti. "Information and Incentives Inside the Firm: Evidence from Loan Officer Rotation." Journal of Finance 65, no. 3 (June 2010): 795-828.


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