Bank Bonuses and Bail-outs

Isabel Schnabel and Hendrik Hakenes

No 8852, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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

Keywords: Bank bail-outs; Bank management compensation; Bonus payments; Limited and unlimited liability; Risk-shifting; Underinvestment (search for similar items in EconPapers)
JEL-codes: G21 G28 J33 M52 (search for similar items in EconPapers)
Date: 2012-02
New Economics Papers: this item is included in nep-ban, nep-cta and nep-hrm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Bank Bonuses and Bailouts (2014)
Working Paper: Bank Bonuses and Bail-Outs (2013)
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