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The Role of Principal-Agent Conflicts in the 1980s Thrift Crisis

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  • Rebel A. Cole
  • Robert A. Eisenbeis

Abstract

Agency theory suggests that many of the costs incurred by the taxpayer during the 1980s thrift crisis were the result of conflicts between principals and their agents. This study models the costs associated with three distinct types of agency conflicts involved in closing an insolvent thrift-conflicts between creditors and owners, between owners and managers, and between taxpayers and government officials. Using a model that controls for sample-selection bias, the study presents strong evidence that thrift owners effected wealth transfers from creditors by undertaking high-risk investments, and that government officials pursued policies that increased losses to the thrift deposit insurance fund which ultimately were funded by the taxpayer. The results do not show that managers effected wealth transfers from owners through expense-preference behavior, but rather that inefficient management increased the losses of the deposit insurance fund. Copyright American Real Estate and Urban Economics Association.

Suggested Citation

  • Rebel A. Cole & Robert A. Eisenbeis, 1996. "The Role of Principal-Agent Conflicts in the 1980s Thrift Crisis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 24(2), pages 195-218.
  • Handle: RePEc:bla:reesec:v:24:y:1996:i:2:p:195-218
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/1540-6229.00687
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    1. Edward J. Kane, 1985. "The Gathering Crisis in Federal Deposit Insurance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262611856, January.
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    Cited by:

    1. Cole, Rebel A. & Fenn, George W., 1996. "The role of commercial real estate investments in the banking crisis of 1985-92," MPRA Paper 24692, University Library of Munich, Germany, revised 01 Nov 2008.
    2. repec:eee:jbfina:v:80:y:2017:i:c:p:235-249 is not listed on IDEAS

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