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Incentives in the Financial Crisis of Our Time

Author

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  • Kolb, Robert W.

Abstract

This article traces the incentives that infected every part of the chain of relationships that constitute the Originate-To-Distribute (OTD) Model of mortgage production. At every step, the OTD Model introduced incentive conflicts that were absent or largely ameliorated in the old Originate-To-Hold (OTH) Model. The article shows how these incentive conflicts helped to create the bubble in housing prices in the United States that started to deflate in 2007 and that led to the financial crisis of 2007-2009.

Suggested Citation

  • Kolb, Robert W., 2010. "Incentives in the Financial Crisis of Our Time," The Journal of Economic Asymmetries, Elsevier, vol. 7(2), pages 21-55.
    • Handle: RePEc:eee:joecas:v:7:y:2010:i:2:p:21-55
    DOI: 10.1016/j.jeca.2010.02.003
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    References listed on IDEAS

    as
    1. Grant, Ruth W., 2006. "Ethics and Incentives: A Political Approach," American Political Science Review, Cambridge University Press, vol. 100(1), pages 29-39, February.
    2. Michael C. Jensen & Kevin J. Murphy, 2010. "CEO Incentives—It's Not How Much You Pay, But How," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 64-76, January.
    3. Ashcraft, Adam B. & Schuermann, Til, 2008. "Understanding the Securitization of Subprime Mortgage Credit," Foundations and Trends(R) in Finance, now publishers, vol. 2(3), pages 191-309, June.
    4. Grant, Ruth W., 2002. "The ethics of incentives: historical origins and contemporary understandings," Economics and Philosophy, Cambridge University Press, vol. 18(1), pages 111-139, April.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Choi, Jin W., 2012. "The Effectiveness of the Small Business Lending Fund (SBLF) Program During the 2007–2010 Financial Crisis," The Journal of Economic Asymmetries, Elsevier, vol. 9(2), pages 59-76.
    2. Choi, Jin Wook, 2013. "The 2007–2010 U.S. financial crisis: Its origins, progressions, and solutions," The Journal of Economic Asymmetries, Elsevier, vol. 10(2), pages 65-77.

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    More about this item

    Keywords

    D02; D14; D18; G18; G21; G24; H11; H12; H23; H81; K23; L22; L51; L85; L88; Credit agencies; Ethics; Executive compensation; Financial crisis; Incentive alignment; Incentives; Mortgages;
    All these keywords.

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services
    • L88 - Industrial Organization - - Industry Studies: Services - - - Government Policy

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