Bankers' Pay Structure And Risk
This 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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