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Competition for Traders and Risk

Author

Listed:
  • Bijlsma, M.
  • Boone, J.

    (Tilburg University, School of Economics and Management)

  • Zwart, Gijsbert

    (Tilburg University, School of Economics and Management)

Abstract

Perverse incentives for banks' traders have played a role in the financial crisis. We study how labor market competition interacts with the structure of compensation to result in excessive risk taking. In a model with trader moral hazard and adverse selection on trader abilities, we demonstrate how banks optimally induce top traders to take more risk as competition on the labor market intensifies, even if banks internalize the costs of negative outcomes. Distorting risk‐taking incentives allows banks to reduce the surplus offered to low‐ability traders. We find that increasing bank capital requirements does not unambiguously reduce risk taking by top traders.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Bijlsma, M. & Boone, J. & Zwart, Gijsbert, 2012. "Competition for Traders and Risk," Other publications TiSEM 389ddae7-00bc-4b00-9e13-f, Tilburg University, School of Economics and Management.
  • Handle: RePEc:tiu:tiutis:389ddae7-00bc-4b00-9e13-ffa55171db5b
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    References listed on IDEAS

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    1. Besley, Timothy J. & Ghatak, Maitreesh, 2011. "Taxation and Regulation of Bonus Pay," CEPR Discussion Papers 8532, C.E.P.R. Discussion Papers.
    2. John Thanassoulis, 2012. "The Case for Intervening in Bankers’ Pay," Journal of Finance, American Finance Association, vol. 67(3), pages 849-895, June.
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    6. Hellwig, Martin F., 2009. "A reconsideration of the Jensen-Meckling model of outside finance," Journal of Financial Intermediation, Elsevier, vol. 18(4), pages 495-525, October.
    7. John Thanassoulis, 2011. "Bankers' Pay Structure And Risk," Economics Series Working Papers 545, University of Oxford, Department of Economics.
    8. Anil K. Kashyap & Raghuram G. Rajan & Jeremy C. Stein, 2008. "Rethinking capital regulation," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 431-471.
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    Citations

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    Cited by:

    1. Acharya, Viral & Litov, Lubomir P. & Sepe, Simone M., 2014. "Seeking Alpha, Taking Risk: Evidence from Non-executive Pay in U.S. Bank Holding Companies," Working Papers 13-18, University of Pennsylvania, Wharton School, Weiss Center.
    2. Matthias Efing & Harald Hau & Patrick Kampkktter & Jean-Charles Rochet, 2018. "Bank Bonus Pay as a Risk Sharing Contract," Working Papers hal-01847442, HAL.
    3. Roland Bénabou & Jean Tirole, 2016. "Bonus Culture: Competitive Pay, Screening, and Multitasking," Journal of Political Economy, University of Chicago Press, vol. 124(2), pages 305-370.
    4. Efing, Matthias & Hau, Harald & Kampkötter, Patrick & Steinbrecher, Johannes, 2015. "Incentive pay and bank risk-taking: Evidence from Austrian, German, and Swiss banks," Journal of International Economics, Elsevier, vol. 96(S1), pages 123-140.
    5. Eberhard Feess & Ansgar Wohlschlegel, 2018. "Bank capital requirements and mandatory deferral of compensation," Journal of Regulatory Economics, Springer, vol. 53(2), pages 206-242, April.
    6. Marinovic, Iván & Povel, Paul, 2017. "Competition for talent under performance manipulation," Journal of Accounting and Economics, Elsevier, vol. 64(1), pages 1-14.
    7. Prachi Mishra & Ariell Reshef, 2019. "How Do Central Bank Governors Matter? Regulation and the Financial Sector," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(2-3), pages 369-402, March.
    8. John Thanassoulis, 2012. "The Case for Intervening in Bankers’ Pay," Journal of Finance, American Finance Association, vol. 67(3), pages 849-895, June.
    9. Jen-Wen Chang & Simpson Zhang, 2018. "Competitive Pay and Excessive Manager Risk-taking," Working Papers 18-02, Office of Financial Research, US Department of the Treasury.
    10. Hamid Boustanifar & Everett Grant & Ariell Reshef, 2016. "Wages and human capital in finance: international evidence, 1970-2005," Globalization Institute Working Papers 266, Federal Reserve Bank of Dallas.

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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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