How Organizational Hierarchy Affects Information Production

Abstract

This paper empirically investigates how organizational hierarchy affects the allocation of credit inside a bank. Using an exogenous variation in organizational design, induced by a reorganization plan implemented in roughly 2,500 bank branches in India during 1999-2006, and employing a difference-in-difference research strategy, we find that an increase in hierarchy of a branch decreases its ability to produce “soft” information on loans. Specifically, we find that an increase in hierarchy leads to more standardization of loans and rationing of “soft information” loans. Furthermore, this standardization leads to a reduction in performance on loans – delinquency rates and returns on similar loans are lower in more hierarchical branches.