How Organizational Hierarchy Affects Information Production


Speaker


Abstract

This paper empirically investigates how organizational hierarchy affects the allocation of credit within a bank. Using an exogenous variation in organizational design, induced by a reorganization plan implemented in roughly 2,000 bank branches in India during 1999-2006, and employing a difference-in-difference research strategy, we find that increased hierarchization of a branch decreases its ability to produce “soft” information on loans. Specifically, we observe that increased hierarchy leads to increased standardization of loans and rationing of “soft information” loans. Furthermore, this standardization brings about a reduction in performance on loans: delinquency rates and returns on similar loans are lower in more hierarchical branches. We also document how hierarchical structures perform better in environments that are characterized by a high degree of corruption, thus highlighting the benefits of hierarchical decision making in restraining rent seeking activities.

This event is an Erasmus Finance Seminar. The Erasmus Finance Seminar series brings prominent researchers in Finance from all over the world to Rotterdam.