Summary of Incentive Pay and Bank Risk-Taking

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Incentive Pay and Bank Risk-Taking summary
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Rating

7 Overall

7 Importance

8 Innovation

6 Style


Recommendation

Banks enjoy a unique position in the capitalist economy: As vital financial infrastructure, they are subject to rules and scrutiny, and they benefit from explicit and implicit government guarantees. As businesses, they must generate good returns for shareholders. But how good, and at what cost to society? This statistically complex and perhaps overly ambitious study by economists Matthias Efing, Harald Hau, Patrick Kampkötter and Johannes Steinbrecher seeks a connection between big bonuses and bank risk taking. Though the authors themselves recognize the inherent shortcomings as well as the socio-political aspects of their work, getAbstract nonetheless suggests their report to bank executives and human resources professionals for its contribution to the study of human economic behavior.

In this summary, you will learn

  • How incentive pay for bank traders affects risk,
  • How lower bonuses affected trading returns after 2008 and
  • Why shareholders might approve of bonuses that encourage excessive risk taking.
 

About the Authors

Matthias Efing is a research assistant and Harald Hau is a professor of economics at the University of Geneva. Patrick Kampkötter is a postdoctoral researcher at the University of Cologne, and Johannes Steinbrecher is a researcher at the CESifo Institute Dresden.

 

Summary

The aftermath of the 2008 financial crisis has spawned serious debate about the links between employee bonus payments and excessive risk taking by banks. Many believe high pre-2008 incentive pay triggered irresponsible behavior that caused the crisis. Due to reporting limitations, most studies have ...

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