Bank Bonuses and Bailouts

Hendrik Hakenes and Isabel Schnabel

Journal of Money, Credit and Banking, 2014, vol. 46, issue s1, 259-288

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 bailouts. If there is a risk‐shifting problem, bailout 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.

Date: 2014
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Citations: View citations in EconPapers (43)

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https://doi.org/10.1111/jmcb.12090

Related works:
Working Paper: Bank Bonuses and Bail-Outs (2013)
Working Paper: Bank Bonuses and Bail-outs (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:46:y:2014:i:s1:p:259-288

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