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Incentive mechanisms, loan decisions and policy rationing

Incentive mechanisms, loan decisions and policy rationing PurposeThe purpose of this paper is to investigate whether negative incentives in the pay-for-performance mechanism would trigger loan officers to strategically reject potentially good loans. If so, what is the feasible solution to alleviate the problem.Design/methodology/approachA framed field experiment was conducted to test loan decision behaviors using loan officers from Rural Credit Cooperatives in Shandong, China. A 2 by 2 between-subject design was adopted to generate variation in incentives and prior information about credit risks.FindingsResults showed that loan officers did ration credit by rejecting more loans when facing risks of personal income loss. However, providing risk information about the application pool boosted the approval rate and offset the behavioral responses by a roughly same magnitude.Research limitations/implicationsFindings in this study suggest that certain institutional settings can result in credit rationing via strategic loan misclassification. Further, information sometimes generates similar effects as those costly incentives or mechanisms that are not implementable in practice.Originality/valueThis study adopted an innovative monetized experimental design that allows researchers to examine the (otherwise unobservable) trade-offs between Type I and Type II error in loan misclassification as incentives change. In addition, an anchoring prior information treatment is used to solicit the relative power of almost costless information and costly monetary incentives, and to point out a potentially feasible solution. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Agricultural Finance Review Emerald Publishing

Incentive mechanisms, loan decisions and policy rationing

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
0002-1466
DOI
10.1108/AFR-08-2015-0032
Publisher site
See Article on Publisher Site

Abstract

PurposeThe purpose of this paper is to investigate whether negative incentives in the pay-for-performance mechanism would trigger loan officers to strategically reject potentially good loans. If so, what is the feasible solution to alleviate the problem.Design/methodology/approachA framed field experiment was conducted to test loan decision behaviors using loan officers from Rural Credit Cooperatives in Shandong, China. A 2 by 2 between-subject design was adopted to generate variation in incentives and prior information about credit risks.FindingsResults showed that loan officers did ration credit by rejecting more loans when facing risks of personal income loss. However, providing risk information about the application pool boosted the approval rate and offset the behavioral responses by a roughly same magnitude.Research limitations/implicationsFindings in this study suggest that certain institutional settings can result in credit rationing via strategic loan misclassification. Further, information sometimes generates similar effects as those costly incentives or mechanisms that are not implementable in practice.Originality/valueThis study adopted an innovative monetized experimental design that allows researchers to examine the (otherwise unobservable) trade-offs between Type I and Type II error in loan misclassification as incentives change. In addition, an anchoring prior information treatment is used to solicit the relative power of almost costless information and costly monetary incentives, and to point out a potentially feasible solution.

Journal

Agricultural Finance ReviewEmerald Publishing

Published: Sep 5, 2016

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