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

Andrew Hertzberg, Columbia Business School
Jose M. Liberti, DePaul University and Tilburg University
Daniel Paravisini, Columbia Business School

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.