The Role of Principal-Agent Conflicts in the 1980s Thrift Crisis

Abstract

Agency theory suggests that many of the costs incurred by the taxpayer during the 1980s thrift crisis were the result of conflicts between principals and their agents. This study models thrift failure costs as a function of three distinct types of agency conflicts: conflicts between creditors and owners, between owners and managers, and between taxpayers and government officials. Using a model that controls for sample-selection bias, the study presents strong evidence that thrift owners effected wealth transfers from creditors by undertaking high-risk investments, and that government officials pursued policies that increased losses to the thrift deposit insurance fund that were ultimately funded by the taxpayer. The results do not show that managers effected wealth transfers from owners through expense-preference behavior, but rather that inefficient management increased losses to the deposit insurance fund.

Keywords: agency, agency cost, failure, moral hazard, principal-agent, saving & loan, S&L, thrift

JEL Classification: G21, G28, G32, G33