Bank Bonuses and Bail-Outs

Hendrik Hakenes and Isabel Schnabel

No 2013_03, Discussion Paper Series of the Max Planck Institute for Research on Collective Goods from Max Planck Institute for Research on Collective Goods

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.

Keywords: bonus payments; bank bail-outs; bank management compensation; risk-shifting; underinvestment; limited and unlimited liability (search for similar items in EconPapers)
JEL-codes: G21 G28 J33 M52 (search for similar items in EconPapers)
Date: 2013-02
New Economics Papers: this item is included in nep-ban, nep-cta, nep-hrm and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Bank Bonuses and Bailouts (2014)
Working Paper: Bank Bonuses and Bail-outs (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:mpg:wpaper:2013_03

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