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Bank Bonuses and Bail-outs

Author

Listed:
  • Hendrik Hakenes

    (University of Bonn)

  • Isabel Schnabel

    (Johannes Gutenberg University Mainz)

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

Suggested Citation

  • Hendrik Hakenes & Isabel Schnabel, 2012. "Bank Bonuses and Bail-outs," Working Papers 1203, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz.
    • Handle: RePEc:jgu:wpaper:1203
    as

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    File URL: https://download.uni-mainz.de/RePEc/pdf/Discussion_Paper_1203.pdf
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    References listed on IDEAS

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    Cited by:

    1. Eufinger, Christian & Gill, Andrej, 2013. "Basel III and CEO compensation in banks: Pay structures as a regulatory signal," SAFE Working Paper Series 9, Leibniz Institute for Financial Research SAFE.
    2. Engert Andreas & Goldlücke Susanne, 2017. "Why Agents Need Discretion: The Business Judgment Rule as Optimal Standard of Care," Review of Law & Economics, De Gruyter, vol. 13(1), pages 1-38, March.

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    More about this item

    Keywords

    Bonus payments; bank bail-outs; bank management compensa tion; risk-shifting; underinvestment; limited and unlimited liability.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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