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Bank Bonuses and Bailouts
Author(s) -
HAKENES HENDRIK,
SCHNABEL ISABEL
Publication year - 2014
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12090
Subject(s) - bailout , agency (philosophy) , compensation (psychology) , moral hazard , welfare , economics , liability , business , monetary economics , microeconomics , finance , incentive , financial crisis , market economy , psychology , philosophy , epistemology , psychoanalysis , macroeconomics
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 bailouts. If there is a risk‐shifting problem, bailout 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 bailout perceptions makes it optimal for a welfare‐maximizing regulator to impose caps on bank bonuses. In contrast, raising managers' liability can be counterproductive.