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Incentive compensation for risk managers when effort is unobservable

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  • Paul H. Kupiec

    (American Enterprise Institute)

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    Abstract

    In a financial intermediary, risk managers can expend effort to reduce loan probability of default and loss given default, but effort is unobservable. Incentive compensation (IC) can induce manager effort. When deposit insurance is subsidized, the demand for risk management declines. Regulatory policy should then reinforce incentives to offer risk mangers appropriate IC contracts.

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    File URL: http://www.aei.org/paper/incentive-compensation-for-risk-managers-when-effort-is-unobservable
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    Bibliographic Info

    Paper provided by American Enterprise Institute in its series Working Papers with number 39230.

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    Date of creation: Oct 2013
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    Handle: RePEc:aei:rpaper:39230

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    Keywords: AEI Economic Policy Working Paper Series;

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