Advanced Search
MyIDEAS: Login

Optimal bonuses and deferred pay for bank employees : implications of hidden actions with persistent effects in time

Contents:

Author Info

  • Arantxa Jarque
  • Edward S. Prescott

Abstract

We present a sequence of two-period models of incentive-based compensation in order to understand how the properties of optimal compensation structures vary with changes in the model environment. Each model corresponds to a different occupation within a bank, such as credit line managers, loan originators, or traders. All models share a common trait: the effects of hidden actions are persistent, and hence are revealed over time. We characterize the corresponding optimal contracts that are consistent with prudent risk taking. We compare the contracts by ranking them according to the average wage, the proportion of deferred compensation, and the structure and importance of variable pay (bonuses). We also compare these characteristics of the models with persistence with those of a standard repeated moral hazard. We find that small changes in the structure of asymmetric information have important implications for the characteristics of optimal pay, and that persistence does not necessarily imply a higher proportion of deferred pay.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://richmondfed.org/publications/research/working_papers/2010/wp_10-16.cfm
Download Restriction: no

File URL: http://richmondfed.org/publications/research/working_papers/2010/pdf/wp10-16.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 10-16.

as in new window
Length:
Date of creation: 2010
Date of revision:
Handle: RePEc:fip:fedrwp:10-16

Contact details of provider:
Web page: http://www.richmondfed.org/
More information through EDIRC

Order Information:
Email:
Web: http://www.richmondfed.org/publications/

Related research

Keywords: Financial institutions ; Financial markets ; Labor market ; Moral hazard;

Other versions of this item:

This paper has been announced in the following NEP Reports:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Borys Grochulski, 2011. "Financial firm resolution policy as a time-consistency problem," Economic Quarterly, Federal Reserve Bank of Richmond, issue 2Q, pages 133-152.
  2. Arantxa Jarque & Edward S. Prescott, 2013. "Banker compensation and bank risk taking: the organizational economics view," Working Paper 13-03, Federal Reserve Bank of Richmond.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:fip:fedrwp:10-16. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (William Perkins).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.