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Bank Bonuses and Bailouts




  • We thank Thorsten Beck, Jakob de Haan, and Robert DeYoung (the Editors); our discussants Uwe Bloos, Fabio Castiglionesi, Christian Eufinger, and Werner Neus; as well as Christoph Engel, Guido Friebel, Charles Goodhart, Alexander Morell, Javier Suarez, Wolf Wagner, one anonymous referee, seminar participants at the Universities of Frankfurt and Hannover, and conference participants of the annual meeting of the German Economic Association, the German Economic Association for Business Administration (GEABA), the German Finance Association (DGF), as well as the 1st Research Workshop in Financial Economics in Mainz and the Post-Crisis Banking Conference in Amsterdam for useful comments and suggestions.


This paper shows that bonus contracts may arise endogenously as a response to agency problems within banks, and analyzes how compensation schemes change in reaction to anticipated bailouts. If there is a risk-shifting problem, bailout expectations lead to steeper bonus schemes and even more risk taking. If there is an effort problem, the compensation scheme becomes flatter and effort decreases. If both types of agency problems are present, a sufficiently large increase in bailout perceptions makes it optimal for a welfare-maximizing regulator to impose caps on bank bonuses. In contrast, raising managers' liability can be counterproductive.

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