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Bonuses, Credit Rating Agencies and the Credit Crunch

  • Peter Sinclair
  • Guy Spier
  • Tom Skinner
Registered author(s):

    The payment of bonuses can bring big benefits. But harm, too, can result. In the financial sector, this is especially true, above all when they are related to noisy indicators of performance over brief periods. This paper starts by exploring these ideas, then proceeds to examine credit rating agencies and their role in the 2007 credit crunch. It emphasizes the paucity of long term high frequency financial data to quantify tail event risks, the failure to apply analysis of fundamentals in financial and housing markets, and rewards structures to individual players that reinforced myopia as three key components of the crisis.

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    File URL: ftp://ftp.bham.ac.uk/pub/RePEc/pdf/08-05.pdf
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    Paper provided by Department of Economics, University of Birmingham in its series Discussion Papers with number 08-05.

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    Length: 21 pages
    Date of creation: Sep 2008
    Date of revision:
    Handle: RePEc:bir:birmec:08-05
    Contact details of provider: Postal: Edgbaston, Birmingham, B15 2TT
    Web page: http://www.economics.bham.ac.uk
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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "Is the 2007 US Sub-prime Financial Crisis So Different? An International Historical Comparison," American Economic Review, American Economic Association, vol. 98(2), pages 339-44, May.
    2. Weitzman, Martin L, 1985. "Profit Sharing as Macroeconomic Policy," American Economic Review, American Economic Association, vol. 75(2), pages 41-45, May.
    3. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
    4. Dixit, Avinash & Besley, Timothy, 1997. " James Mirrlees' Contributions to the Theory of Information and Incentives," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(2), pages 207-35, June.
    5. Akerlof, George A, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, MIT Press, vol. 97(4), pages 543-69, November.
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