Compensation contracts and fire sales
This paper analyzes the impact of remuneration practices on banks’ risk-taking in a model with fire sales externalities. When these externalities are not internalized by a bank's shareholders and executives, borrowing and fire sales are higher than the socially optimal level. Our analysis shows...
| Autores: | , |
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| Tipo de recurso: | artículo |
| Fecha de publicación: | 2015 |
| País: | España |
| Institución: | IE |
| Repositorio: | Repositorio IE |
| OAI Identifier: | oai:repositorio.ie.edu:20.500.14417/3313 |
| Acceso en línea: | https://doi.org/10.1016/j.jfs.2015.04.002 https://hdl.handle.net/20.500.14417/3313 https://www.sciencedirect.com/journal/journal-of-financial-stability |
| Access Level: | acceso abierto |
| Palabra clave: | Executive Compensation Bail-in Bonds Deferred Equity Fire Sales 53 Ciencias Económicas ODS 1 - Fin de la pobreza ODS 8 - Trabajo decente y crecimiento económico ODS 9 - Industria, innovación e infraestructura ODS 10 - Reducción de las desigualdades |
| Sumario: | This paper analyzes the impact of remuneration practices on banks’ risk-taking in a model with fire sales externalities. When these externalities are not internalized by a bank's shareholders and executives, borrowing and fire sales are higher than the socially optimal level. Our analysis shows that plain-vanilla equity fails to internalize fire sales externalities. Deferred equity and long-term bonuses unrelated to short-term profits can restore social efficiency. Bail-in bonds can achieve efficiency at a smaller cost since they allow for state-contingent payments. It is not the level but the composition of variable compensation that determines the inefficiency. Excessive regulation may lead to suboptimal levels of risk-taking. Government guarantees reinforce the fire sales externalities and the need for regulation. |
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