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Investment banking careers: an equilibrium theory of overpaid jobs

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  • Axelson, Ulf
  • Bond, Philip

Abstract

We develop an optimal dynamic contracting theory of overpay for jobs in which moral hazard is a key concern, such as investment banking. Overpaying jobs feature up-or-out contracts and long work hours, yet give more utility to workers than their outside option dictates. Labor markets feature "dynamic segregation," where some workers are put on fast-track careers in overpaying jobs and others have no chance of entering the overpaying segment. Entering the labor market in bad economic times has life-long negative implications for a worker's career both in terms of job placement and contract terms. Moral hazard problems are exacerbated in good economic times, which leads to countercyclical productivity. Finally, workers whose talent would be more valuable elsewhere can be lured into overpaying jobs, while the most talented workers might be unable to land these jobs because they are "too hard to manage".

Suggested Citation

  • Axelson, Ulf & Bond, Philip, 2011. "Investment banking careers: an equilibrium theory of overpaid jobs," LSE Research Online Documents on Economics 119062, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:119062
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    File URL: http://eprints.lse.ac.uk/119062/
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    References listed on IDEAS

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    More about this item

    Keywords

    investment banking; compensation contracts;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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