Incentives in universal banks
This paper studies the provision of incentives in a universal bank. This is regarded as a (common) agent serving different clients with potentially conflicting interests; for example, it may buy assets on behalf of investors and sell assets on behalf of issuing firms. The clients offer incentive schemes to the bank and they behave non-cooperatively. The bank decides a level of effort and, when firewalls are absent, a level of collusion, modelled as a costly and unproductive redistribution of wealth among the clients. The main conclusion is that in the absence of firewalls the equilibrium incentive schemes are steeper. This means that the level of effort is higher and may compensate the (ex post) inefficiency of collusion. Moreover, this is shown not to hold in the presence of one naive player who does not recognize the existence of the conflict of interest. The model allows to draw conclusions about the desirability of firewalls or of softer measures like the imposition of transparency requirements.
|Date of creation:||Jan 2006|
|Date of revision:|
|Contact details of provider:|| Postal: Via Nazionale, 91 - 00184 Roma|
Web page: http://www.bancaditalia.it
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michael Peters, 1999.
"Common Agency and the Revelation Principle,"
peters-99-01, University of Toronto, Department of Economics.
- Kofman, F. & Lawarree, J., 1993.
"On the Optimality of Allowing Collusion,"
93-02, University of Washington, Department of Economics.
- Kofman, F. & Lawarree, J., 1993. "On the Optimality of Allowing Collusion," Discussion Papers in Economics at the University of Washington 93-02, Department of Economics at the University of Washington.
- John H. Boyd & Chun Chang & Bruce D. Smith, 1998.
"Moral hazard under commercial and universal banking,"
585, Federal Reserve Bank of Minneapolis.
- John H. Boyd & Chun Chang & Bruce D. Smith, 1998. "Moral hazard under commercial and universal banking," Proceedings, Federal Reserve Bank of Cleveland, issue Aug, pages 426-471.
- Boyd, John H & Chang, Chun & Smith, Bruce D, 1998. "Moral Hazard under Commercial and Universal Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 426-68, August.
- Randall S. Kroszner & Raghuram G. Rajan, 1995.
"Organization Structure and Credibility: Evidence from Commercial Bank Securities Activities Before the Glass-Steagall Act,"
NBER Working Papers
5256, National Bureau of Economic Research, Inc.
- Kroszner, Randall S. & Rajan, Raghuram G., 1997. "Organization structure and credibility: Evidence from commercial bank securities activities before the Glass-Steagall Act," Journal of Monetary Economics, Elsevier, vol. 39(3), pages 475-516, August.
- Randall S. Kroszner & Raghuram G. Rajan, . "Organization Structure and Credibility: Evidence from Commercial Bank Securities Activities Before the Glass-Steagall Act," CRSP working papers 325, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Hoernig, Steffen H., 2002. "Mixed Bertrand equilibria under decreasing returns to scale: an embarrassment of riches," Economics Letters, Elsevier, vol. 74(3), pages 359-362, February.
- Joel S. Demski, 2003. "Corporate Conflicts of Interest," Journal of Economic Perspectives, American Economic Association, vol. 17(2), pages 51-72, Spring.
- Puri, Manju, 1996. "Commercial banks in investment banking Conflict of interest or certification role?," Journal of Financial Economics, Elsevier, vol. 40(3), pages 373-401, March.
- Martimort, David, 1996. "The multiprincipal nature of government," European Economic Review, Elsevier, vol. 40(3-5), pages 673-685, April.
- Diamond, Douglas W, 1998. "Comment on "Moral Hazard under Commercial and Universal Banking."," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 469-71, August.
- Diamond, Douglas W & Dybvig, Philip H, 1983.
"Bank Runs, Deposit Insurance, and Liquidity,"
Journal of Political Economy,
University of Chicago Press, vol. 91(3), pages 401-19, June.
When requesting a correction, please mention this item's handle: RePEc:bdi:wptemi:td_572_06. 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: ()
If references are entirely missing, you can add them using this form.