This paper uses a series of experiments with commercial bank loan officers to test the effect of performance incentives on risk-assessment and lending decisions. We first show that, while high-powered incentives lead to greater screening effort and more profitable lending, their power is muted by both deferred compensation and the limited liability typically enjoyed by credit officers. Second, we present direct evidence that incentive contracts distort judgment and beliefs, even among trained professionals with many years of experience. Loans evaluated under more permissive incentive schemes are rated significantly less risky than the same loans evaluated under pay-for-performance.JEL: D03, G21 J22, J33, L2

We study the role of morality in debt repayment, using an experiment with the credit card customers of a large Islamic bank in Indonesia. In our main treatment, clients receive a text message stating that "non-repayment of debts by someone who is able to repay is an injustice." This moral appeal decreases the share of delinquent customers by 4.4 percentage points from a baseline of 66 percent, and reduces default among the customers with the highest ex-ante credit risk. Additional treatments help benchmark the effects against those of direct financial incentives, understand the underlying mechanisms, and rule out competing explanations, such as reminder effects, priming religion, signaling the lender's commitment to debt collection, and provision of new information.1 late payment fee, and the customer is reported to the Indonesian credit registry, which generally precludes borrowing from any formal sector lender for at least 24 months-the time period for which the negative entry remains on record-even if the debt is eventually repaid. The main outcome of interest in our experiments is therefore the discrete choice between repaying before the end of the grace period or becoming delinquent.In the main treatment condition of our experiment, late-paying customers receive a text message which highlights that not repaying a debt when one is able to repay violates a moral norm. The message refers to the Islamic doctrine on non-repayment of debts using a quote from the Shahihal-Bukhari, one of the main religious texts of Sunni Islam, which serves as an important source for the interpretation of Islamic law and is widely known and respected among Indonesian Muslims: 4The Prophet (Peace and blessings be upon Him) says: "non-repayment of debts by someone who is able to repay is an injustice." (Imam al-Bukhari) Please repay your credit card balance at your earliest convenience. Call [customer service number].The design of our experiment has several important features that help us identify the effect of moral appeals on debt repayment. First, debt repayment is a common and consequential financial decision, and we are able to use a real-stakes field experiment integrated into the credit card repayment cycle of a large bank to study this decision directly. Second, the text messages in our experiment are sent through the bank's automated system, allowing us to address the moral appeal to delinquent customers individually. Third, the bank routinely uses text messages to communicate with its customers, and messages with religious or moral content are not uncommon. Therefore, both the channel of communication and the content of the messages in our experiment are credible and natural in this setting. Finally, our design allows us to examine the mechanism through which moral appeals affect behavior. Many moral appeals used in practice rely on a reference to a moral authority, such as religion, family values, or the law. Our treatments isolate the moral statement from any explicit references to religion, allowing us to test whether an...

Yanagizawa-Drott, and numerous seminar participants for helpful comments and suggestions. Support from the World Bank Strategic Research Program is gratefully acknowledged. The opinions expressed do not necessarily represent the views of the World Bank, its Executive Directors, or the countries they represent. This study was approved by the UCLA Institutional Review Board. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

This paper studies the impact of debt relief, using a natural experiment arising from India's “Agricultural Debt Waiver and Debt Relief Scheme,” one of the largest household-level debt relief initiatives in history. I find that debt relief has a substantial impact on household balance sheets, but does not affect savings, consumption and investment, as predicted by theories of debt overhang or balance sheet distress. Instead, debt relief leads to greater reliance on informal credit, reduced investment, and lower agricultural productivity. Consistent with moral hazard generated by the bailout, beneficiaries are significantly less concerned about the reputational consequences of future default. (JEL D14, G28, O12, O16, O18, Q14, Q18)

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.