Bank Bonuses and Bail-outs

Hendrik Hakenes () and Isabel Schnabel ()
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Hendrik Hakenes: University of Bonn
Isabel Schnabel: Johannes Gutenberg University Mainz

No 1203, Working Papers from Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz

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 ef fort decreases. If both types of agency problems are present, a sufficiently large increase in bail-out perceptions makes it optimal for a welfare-maximizing reg ulator to impose caps on bank bonuses. In contrast, raising managers’ liability is counterproductive.

Keywords: Bonus payments; bank bail-outs; bank management compensa tion; 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)
Pages: 38 pages
Date: 2012-02-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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https://download.uni-mainz.de/RePEc/pdf/Discussion_Paper_1203.pdf First version, 2012 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:jgu:wpaper:1203

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