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





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    • Hertzberg is from Columbia Business School. Liberti is from DePaul University. Paravisini is from Columbia Business School and BREAD. The authors thank Campbell Harvey (the editor); the associate editor; two anonymous referees; Patrick Bolton; Doug Diamond; Andrea Eisfeldt; Tom Hubbard; Ulrike Malmendier; David Matsa; Atif Mian; Thomas Philippon; Jonah Rockoff; Morten Sorensen; Scott Stern; Per Stromberg; Catherine Thomas; Jules van Binsbergen; seminar participants at Berkeley Haas School of Business, Boston University, Chicago, GSB, Columbia Business School, Duke Fuqua School of Business, Harvard/MIT Organizational Economics, LBS, LSE, MIT Sloan, Northwestern University Kellogg, NYU Stern, San Francisco Federal Reserve Bank, and Stanford GSB; and participants at the CEPR European Summer Symposium in Financial Markets, European Finance Association Annual Meeting, CEPR Banking and Macroeconomy Conference, London School of Economics Financial Markets Group Conference, and NBER Corporate Finance Spring Meeting. We greatly appreciate the superb research assistance of Michael Niessner and Ronald Chan. We especially thank Germán Blanco for helping us to assemble this database.


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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