The Labor Market for Bankers and Regulators
University of Washington - Michael G. Foster School of Business
University of Pennsylvania - The Wharton School
October 14, 2013
Review of Financial Studies, Forthcoming
We propose a labor market model in which agents with heterogeneous ability levels choose to work as bankers or as financial regulators. When workers extract intrinsic benefits from working in regulation (such as public-sector motivation or human capital accumulation), our model jointly predicts that bankers are, on average, more skilled than regulators and their compensation is more sensitive to performance. During financial booms, banks draw the best workers away from the regulatory sector and misbehavior increases. In a dynamic extension of our model, young regulators accumulate human capital and the best ones switch to banking in mid-career.
Number of Pages in PDF File: 57
Keywords: Financial regulation, banking, fraud, intrinsic benefit, career choice
JEL Classification: G28, J24, J45Accepted Paper Series
Date posted: November 21, 2010 ; Last revised: November 13, 2013
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