Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/84997
Authors: 
Hakenes, Hendrik
Schnabel, Isabel
Year of Publication: 
2013
Series/Report no.: 
Preprints of the Max Planck Institute for Research on Collective Goods 2013/3
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.
Subjects: 
bonus payments
bank bail-outs
bank management compensation
risk-shifting
underinvestment
limited and unlimited liability
JEL: 
J33
G21
G28
M52
Document Type: 
Working Paper

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