Risk Taking Incentives and the Great Financial Crisis *

Jean-Pierre Danthine

PSE Working Papers from HAL

Abstract: High leverage distorts the purpose of limited liability. Limited liability is a design feature intended to promote risk taking. It is not appropriate in situations where decision-makers are prone to socially excessive risk taking. While much progress has been made to correct risk taking incentives in banking under Basel 3, not enough has been done to address the toxic cocktail resulting from combining high leverage with limited liability. Deferred compensation schemes should be generalized and bonus payments in the form of high trigger Cocos should be promoted.

Keywords: risk taking; financial crisis (search for similar items in EconPapers)
Date: 2017-07
New Economics Papers: this item is included in nep-ban
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Related works:
Working Paper: Risk Taking Incentives and the Great Financial Crisis (2019)
Working Paper: Risk Taking Incentives and the Great Financial Crisis (2019)
Working Paper: Risk Taking Incentives and the Great Financial Crisis * (2017)
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