Fenghua Song and
Anjan V. Thakor
Journal of Financial Intermediation, 2019, vol. 39, issue C, 59-79
We develop a model in which bank culture improves upon outcomes attainable with incentive contracting. The bank designs a second-best incentive contract to induce the desired managerial effort allocation across growth and safety, but this induces excessive growth relative to the first best, a distortion exacerbated by interbank competition. Bank culture has two effects: it matches managers to banks with similar beliefs, and a safety-oriented culture reduces the competition-induced excessive growth focus. Culture is also contagious – a safety-oriented culture in some banks causes others to follow suit – this effect strengthens with higher bank capital and weakens with stronger safety nets.
Keywords: Bank culture; Growth; Safety; Competition; Bank capital; Safety nets (search for similar items in EconPapers)
JEL-codes: G21 M14 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:39:y:2019:i:c:p:59-79
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