Working Paper: CEPR ID: DP9877
Authors: Florian Hoffmann; Roman Inderst; Marcus Opp
Abstract: Our paper examines the effect of recent regulatory proposals mandating the deferral of bonus payments and claw-back clauses for compensation contracts in the financial sector. We study a multi-task setting in which a bank employee, the agent, privately chooses (deal or customer) acquisition effort and diligence, which stochastically reduces the occurrence of negative events over time (such as loan defaults or customer cancellations). The key ingredient of the compensation contract is the endogenous timing of a long-term bonus that trades off the cost and benefit of delay resulting from agent impatience and the informational gain, respectively. Our main finding is that government interference with this privately optimal choice may
Keywords: compensation design; financial regulation; principal-agent models
JEL Codes: D86; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Regulating deferred incentive pay (J33) | Increased diligence (G34) |
| Regulating deferred incentive pay (J33) | Decreased diligence (G33) |
| Regulating deferred incentive pay (J33) | Performance outcomes (L25) |
| Increased diligence (G34) | Performance outcomes (L25) |
| Decreased diligence (G33) | Performance outcomes (L25) |