Is Capping Executive Bonuses Useful?
Electronic Access:
Free Download. Use the free Adobe Acrobat Reader to view this PDF file
Summary:
This paper develops a theoretical framework to study the impact of bonus caps on banks’ risk taking. In the model, labor market price adjustments can offset the direct effects of bonus caps. The calibrated model suggests that bonus caps are only effective when bank executives’ mobility is restricted. It also suggests, irrespective of the degree of labor market mobility, bonus caps simultaneously reduce risk shifting by bank executives (too much risk taking because of limited liability), but aggravate underinvestment (bank executives foregoing risky but productive projects). Hence, the welfare effects of bonus caps critically depend on initial conditions, including the relative importance of risk shifting versus underinvestment.
Series:
Working Paper No. 16/196
Subject:
Banks Bonus Econometric models Employee compensation Investment Labor markets Labor mobility Risk management
English
Publication Date:
September 29, 2016
ISBN/ISSN:
9781475543254/1018-5941
Stock No:
WPIEA2016196
Format:
Paper
Pages:
37
Please address any questions about this title to publications@imf.org