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Bank Bonuses and Bail-Outs

Author

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  • Hendrik Hakenes

    (University of Bonn, Finance Department)

  • Isabel Schnabel

    (Gutenberg School of Management and Economics, Johannes Gutenberg University Mainz)

Abstract

This paper shows that bonus contracts may arise endogenously as a response to agency problems within banks, and analyzes how compensation schemes change in reaction to anticipated bail-outs. If there is a risk-shifting problem, bail-out expectations lead to steeper bonus schemes and even more risk-taking. If there is an effort problem, the compensation scheme becomes flatter and effort decreases. If both types of agency problems are present, a sufficiently large increase in bailout perceptions makes it optimal for a welfare-maximizing regulator to impose caps on bank bonuses. In contrast, raising managers’ liability can be counterproductive.

Suggested Citation

  • Hendrik Hakenes & Isabel Schnabel, 2013. "Bank Bonuses and Bail-Outs," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2013_03, Max Planck Institute for Research on Collective Goods.
    • Handle: RePEc:mpg:wpaper:2013_03
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    bonus payments; bank bail-outs; bank management compensation; risk-shifting; underinvestment; limited and unlimited liability;
    All these keywords.

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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