IDEAS home Printed from https://ideas.repec.org/p/red/sed014/1293.html
   My bibliography  Save this paper

Agency Cost Determinants of Bank Risk-Taking

Author

Listed:
  • Kinda Hachem

    (University of Chicago)

Abstract

This paper studies risk-taking when loan officer compensation is optimally structured to generate competition. Compensation contracts are necessary because bank managers must incentivize officers to screen borrowers and charge type-contingent loan rates. Optimality of a relative performance contract then arises because the bank is imperfectly informed about the quality of the borrower pool from which officers draw. If even good borrowers are slightly risky, I find that the optimal contract can be implemented as a rank-order tournament which compels loan officers to minimize risk-taking across the board. Otherwise, rank-order tournaments are not optimal and a bank which restricts attention to them will find selected risk-taking less costly to incentivize when moderately pessimistic about the borrower pool. Therefore, if the fixed cost of changing compensation structures is high, transitioning from a world without riskless assets to a world with riskless assets can actually increase risk-taking and create more dispersion in the output of bank-dependent borrowers.

Suggested Citation

  • Kinda Hachem, 2014. "Agency Cost Determinants of Bank Risk-Taking," 2014 Meeting Papers 1293, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:1293
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed014:1293. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Zimmermann (email available below). General contact details of provider: https://edirc.repec.org/data/sedddea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.