Bankers' Pay Structure And Risk
AbstractThis paper studies the contracting problem between banks and their bankers, embedded in a competitive labour market for banker talent.� To motivate effort banks must use some variable remuneration.� Such remuneration introduces a risk-shifting problem by creating incentives to inflate early earnings: to manage this some bonus pay is optimally deferred.� As competition between banks for bankers rises it becomes more expensive to manage the risk-shifting problem than the moral hazard problem.� If competition grows strong enough, contracts which permit some risk-shifting become optimal.� Empirically I demonstrate that balance sheets have changed in a manner which triggers this mechanism.
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Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 545.
Date of creation: 01 Apr 2011
Date of revision:
Risk-shifting; Moral hazard; Incentives; Bonuses; Banks; Bankers' pay;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-04-23 (All new papers)
- NEP-BAN-2011-04-23 (Banking)
- NEP-CTA-2011-04-23 (Contract Theory & Applications)
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