Faculty & Research

In 2002 and 2003, many Chinese banks implemented policy reforms that delegated lending decisions and increased the accountability to individual decision makers. The policy change followed China’s entrance into the WTO and offers a plausibly exogenous shock to loan officer incentives to invest in soft information. Using detailed loan-level data from a large, stateowned bank, we find that an internal borrower-risk assessments (‘soft’ information) have a more pronounced effect, relative to publicly available information (‘hard’ information), on both price and non-price terms of loan contracts after the reform. When the loan approval decision is made at the branch above which the risk assessment is made, the use of soft information declines. Our results highlight how organizational structure and incentives can affect the production and quality of soft information.