CONTROLLING BANKERS' BONUSES: EFFICIENT REGULATION OR POLITICS OF ENVY?

Kent Matthews and Owen Matthews

Economic Affairs, 2010, vol. 30, issue 1, 71-76

Abstract: The positive relationship between bank CEO compensation and risk‐taking is a well‐established empirical fact. The global banking crisis has resulted in a chorus of demands to control bankers' bonuses and thereby curtail their risk‐taking activities in the hope that the world can avoid a repeat in the future. However, the positive relationship is not a causative one. In this paper we argue that an implicit too‐big‐to‐fail policy provides the incentive for banks to take excessive risks and design compensation packages to deliver high returns. A credible no‐bailout policy will have a better chance of curbing excess risk‐taking than controlling bankers' compensation.

Date: 2010
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https://doi.org/10.1111/j.1468-0270.2009.01977.x

Related works:
Working Paper: Controlling Banker's Bonuses: Efficient Regulation or Politics of Envy? (2009)
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