{
  "title": "Is Capping Executive Bonuses Useful?",
  "publication": "IMF Working Papers, September 29, 2016",
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  "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.",
  "sections": [
    {
      "heading": "Theoretical framework and model design",
      "content": "- Develops a theoretical framework to study the impact of bonus caps on banks’ risk taking.\n- Incorporates labor market price adjustments that can offset the direct effects of bonus caps.\n- Focuses on interactions between executive compensation design, labor mobility, and bank investment/risk choices.\n- Key terminology preserved from the source: base pay, Bonuses, incentive contract, payoff schedule, schedule of shareholder, market portfolio, composite index."
    },
    {
      "heading": "Calibrated model findings",
      "content": "- Bonus caps are only effective when bank executives’ mobility is restricted.\n- Irrespective of the degree of labor market mobility:\n  - Bonus caps reduce risk shifting by bank executives (defined as too much risk taking because of limited liability).\n  - Bonus caps aggravate underinvestment (bank executives foregoing risky but productive projects).\n- Welfare effects of bonus caps critically depend on initial conditions, including the relative importance of risk shifting versus underinvestment.\n- Labor market price adjustments can offset direct effects of bonus caps."
    },
    {
      "heading": "Policy implications and caveats",
      "content": "- Effectiveness of bonus caps hinges on labor market mobility: restricted mobility increases effectiveness.\n- Policymakers should weigh reductions in risk shifting against potential increases in underinvestment when considering bonus caps.\n- Optimal policy assessment requires information on initial conditions and the relative prevalence of risk shifting versus underinvestment in the banking sector.\n\n---\n\n Content in this bundle\n\n- Is Capping Executive Bonuses Useful?\n  - Is Capping Executive Bonuses Useful? (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Is Capping Executive Bonuses Useful? (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/is-capping-executive-bonuses-useful-44316"
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    "Authors: Kentaro Asai",
    "Published: September 29, 2016",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781475543254.001",
    "Develops a theoretical framework to study the impact of bonus caps on banks’ risk taking.",
    "Incorporates labor market price adjustments that can offset the direct effects of bonus caps.",
    "Focuses on interactions between executive compensation design, labor mobility, and bank investment/risk choices.",
    "Key terminology preserved from the source: base pay, Bonuses, incentive contract, payoff schedule, schedule of shareholder, market portfolio, composite index.",
    "Bonus caps are only effective when bank executives’ mobility is restricted.",
    "Irrespective of the degree of labor market mobility:",
    "Welfare effects of bonus caps critically depend on initial conditions, including the relative importance of risk shifting versus underinvestment.",
    "Labor market price adjustments can offset direct effects of bonus caps.",
    "Effectiveness of bonus caps hinges on labor market mobility: restricted mobility increases effectiveness.",
    "Policymakers should weigh reductions in risk shifting against potential increases in underinvestment when considering bonus caps.",
    "Optimal policy assessment requires information on initial conditions and the relative prevalence of risk shifting versus underinvestment in the banking sector.",
    "**Is Capping Executive Bonuses Useful?**"
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