Publication:
Compensation contracts and fire sales

Thumbnail Image
Files
Compensation contracts and fire sales.pdf (352.51 KB)
Date
2015-06
Authors
Advisor
Court
Journal Title
Journal ISSN
Volume Title
Publisher
Elsevier
Defense Date
Metrics
Citation
Research Projects
Organizational Units
Journal Issue
URI
https://hdl.handle.net/20.500.14417/3313
DOI
https://doi.org/10.1016/j.jfs.2015.04.002
Abstract
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.
Unesco subjects
License
Attribution-NoDerivatives 4.0 International
School
IE Business School
Center
Keywords
Citation
Pedro Gete, Juan-Pedro Gómez, Compensation contracts and fire sales, Journal of Financial Stability, Volume 18, 2015, Pages 154-171, ISSN 1572-3089. https://doi.org/10.1016/j.jfs.2015.04.002
Collections
Research Articles