Competition for traders and risk

Michiel Bijlsma, Jan Boone and Gijsbert Zwart

RAND Journal of Economics, 2018, vol. 49, issue 4, 855-876

Abstract: Perverse incentives for banks' traders have played a role in the financial crisis. We study how labor market competition interacts with the structure of compensation to result in excessive risk taking. In a model with trader moral hazard and adverse selection on trader abilities, we demonstrate how banks optimally induce top traders to take more risk as competition on the labor market intensifies, even if banks internalize the costs of negative outcomes. Distorting risk‐taking incentives allows banks to reduce the surplus offered to low‐ability traders. We find that increasing bank capital requirements does not unambiguously reduce risk taking by top traders.

Date: 2018
References: Add references at CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://doi.org/10.1111/1756-2171.12254

Related works:
Working Paper: Competition for traders and risk (2012)
Working Paper: Competition for traders and risk (2012)
Working Paper: Competition for Traders and Risk (2012)
Working Paper: Competition for Traders and Risk (2012)
Working Paper: Competition for Traders and Risk (2012)
Working Paper: Competition for Traders and Risk (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:randje:v:49:y:2018:i:4:p:855-876

Ordering information: This journal article can be ordered from
http://www.blackwell ... al.asp?ref=0741-6261

Access Statistics for this article

RAND Journal of Economics is currently edited by James Hosek

More articles in RAND Journal of Economics from RAND Corporation Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().