Initiative, Incentives, and Soft Information

Abstract

This paper examines how organizational form affects incentives inside a financial institution. Using unique organization-level data, I exploit a change to the hierarchical organization to test whether delegation of authority and reduction of oversight improve the provision of effort by loan officers. I find that empowering loan officers increases their effort in producing and using soft information in their lending decisions. Consistent with the incentive view of delegation, loan officers who receive more authority rely more on soft information relative to hard information in their decisions than those for whom authority is only partially or not delegated. The results shed light on the importance of organizational design for the production and use of soft information in financial institutions. This paper was accepted by Amit Seru, finance.