Competition for traders and risk

Abstract

Perverse incentives for banks' traders have played a role in the financial crisis. We study how labor market competition interacts with the structure of compensation to result in excessive risk taking. In a model with trader moral hazard and adverse selection on trader abilities, we demonstrate how banks optimally induce top traders to take more risk as competition on the labor market intensifies, even if banks internalize the costs of negative outcomes. Distorting risk‐taking incentives allows banks to reduce the surplus offered to low‐ability traders. We find that increasing bank capital requirements does not unambiguously reduce risk taking by top traders.

Managerial discretion and shareholder capital at risk

“…Finally, our paper is in the line of the work on excessive risk taking by traders: a manager making too large a risky investment in our model is akin to a trader entering into too risky a position in the models of Acharya, Pagano, and Volpin (2016), Bannier, Feess, and Packham (2013), Bénabou and Tirole (2016), Bijlsma, Boone, and Zwart (2018), van Boxtel (2017), Makarov and Plantin (2015), and Thanassoulis (2012). A fundamental difference between these models and ours is that excessive risk stems from the inability to distinguish between good and bad traders in these models, whereas it stems from the need to induce a manager of known ability to engage in both resource generation and resource allocation in ours.…”

Market competition and risk assessment of nanofiber composite materials

“…1). It has the advantages of high degree of polymerization, high strength, degradability, and large specific surface area (Bijlsma et al 2018). As competition in the nanocellulose industry continues to intensify, companies are paying more and more attention to in-depth research on the market.…”