How Organizational Hierarchy Affects Information Production

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-differences research strategy, we find that increased hierarchization of a branch decreases its ability to produce “soft” information on loans, leads to increased standardization of loans and rationing of “soft information” loans.  Furthermore, this loss of information brings about a reduction in performance on loans:  delinquency rates and returns on similar loans are worse 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. Finally, we document a channel – managerial interference – through which hierarchy affects loan outcomes.