Banker Compensation and Bank Risk Taking: The Organizational Economics View
نویسندگان
چکیده
A multi–agent, moral–hazard model is used to analyze how to regulate compensation of bank employees below a CEO in order to limit bank risk. Unlike in the single–agent model, pay for performance does not necessarily create risk. If employee returns are uncorrelated, pay is irrelevant for risk. If returns are correlated, a low wage can indicate risk. If correlation is endogenous, relative–performance contracts that encourage correlation of returns can create risk. A sufficient condition for compensation to induce bank risk is provided. A loan review function is added; evaluating bank controls is identified as an alternative means for limiting risk.
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