Bank Bonuses and Bail-outs
AbstractThis paper shows that bonus contracts may arise endogenously as a response to agency problems within banks, and analyzes how compensation schemes change in reaction to anticipated bail-outs. If there is a risk-shifting problem, bail-out expectations lead to steeper bonus schemes and even more risk-taking. If there is an effort problem, the compensation scheme becomes flatter and effort decreases. If both types of agency problems are present, a sufficiently large increase in bail-out perceptions makes it optimal for a welfare-maximizing regulator to impose caps on bank bonuses. In contrast, raising managers’ liability is counterproductive.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8852.
Date of creation: Feb 2012
Date of revision:
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Other versions of this item:
- Hendrik Hakenes & Isabel Schnabel, 2013. "Bank Bonuses and Bail-Outs," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2013_03, Max Planck Institute for Research on Collective Goods.
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
- M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-28 (All new papers)
- NEP-BAN-2012-03-28 (Banking)
- NEP-CTA-2012-03-28 (Contract Theory & Applications)
- NEP-HRM-2012-03-28 (Human Capital & Human Resource Management)
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