Soft Information and The Cost Of Job Rotation: Evidence From Loan Officer Rotation

Working Papers
Subramanian, Krishnamurthy., Tantri, Prasanna.,Bhowal, Subhendu. "Soft Information and The Cost Of Job Rotation: Evidence From Loan Officer Rotation", Hyderabad, India
Abstract:
We highlight the costs from a principal rotating agents among tasks when decision-making inside a firm is driven by soft information. These costs arise because (i) an incoming agent cannot verify the information set that the outgoing agent utilized, and (ii) neither agent receives the entire marginal benefit/penalty for her effort. We provide evidence of this cost using unique loan and officer level data from a large public sector bank in India. Using the bank's fixed-tenure-based policy of loan officer rotation for identification, we find that default probabilities are 8% higher for loans affected by job rotation when compared to other loans. This difference is not explained by differences in hard information or the loss of a lending relationship