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Compensating victims of bankrupted financial institutions: a law and economic analysis

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  • Robert J. Dijkstra
  • Michael G. Faure
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    Abstract

    Purpose – The purpose of this paper is to understand the incentive effects of existing compensation mechanisms in case of the bankruptcy of a financial institution. Design/methodology/approach – The paper uses insights of law and economics to predict the effects of compensation mechanisms on the incentives of depositors, financial institutions, financial regulators and government. Findings – The paper shows that the current compensation system in The Netherlands will not provide sufficient incentives for all stakeholders to prevent the failure of a financial institution. Adjustments to this system are necessary to improve these incentives. Original/value – The paper examines for the first time the impact of different compensation mechanisms on the incentives of multiple stakeholders. It also shows how these mechanisms influence each other regarding their incentive generating capability. These findings offer important insights for policy makers.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Journal of Financial Regulation and Compliance.

    Volume (Year): 19 (2011)
    Issue (Month): 2 (May)
    Pages: 156-173

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    Handle: RePEc:eme:jfrcpp:v:19:y:2011:i:2:p:156-173

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    Related research

    Keywords: Compensation; Economics; Law; Torts;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Anthony M. Santomero, 1997. "Deposit Insurance:Do we need it and why?," Ekonomia, Cyprus Economic Society and University of Cyprus, vol. 1(1), pages 1-19, Summer.
    2. Kaplow, Louis, 1991. " Incentives and Government Relief for Risk," Journal of Risk and Uncertainty, Springer, vol. 4(2), pages 167-75, April.
    3. Kane, Edward J., 2000. "Designing financial safety nets to fit country circumstances," Policy Research Working Paper Series 2453, The World Bank.
    4. Sebastian Schich, 2008. "Financial turbulence: Some lessons regarding deposit insurance," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2008(1), pages 55-79.
    5. Edward J. Kane & Asli Demirguc-Kunt, 2001. "Deposit Insurance Around the Globe: Where Does it Work?," NBER Working Papers 8493, National Bureau of Economic Research, Inc.
    6. Anthony M. Santomero, 1997. "Deposit Insurance: Do We Need It and Why?," Center for Financial Institutions Working Papers 97-35, Wharton School Center for Financial Institutions, University of Pennsylvania.
    7. James B. Thomson, 1990. "Using market incentives to reform bank regulation and federal deposit insurance," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 28-40.
    8. Oscar Couwenberg & Abe Jong, 2008. "Costs and recovery rates in the Dutch liquidation-based bankruptcy system," European Journal of Law and Economics, Springer, vol. 26(2), pages 105-127, October.
    9. Shavell, Steven, 1979. "On Moral Hazard and Insurance," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 541-62, November.
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