Compensating Financial Experts
University of Pennsylvania - The Wharton School
University of Texas-Austin
January 27, 2015
Journal of Finance, Forthcoming
We propose a labor market model in which financial firms compete for a scarce supply of workers who can either be employed as traders or as bankers. While hiring bankers allows to create a surplus that can be split between a firm and its trading counterparties, hiring traders helps to appropriate a greater share of that surplus away from the firm's counterparties. Firms bid defensively for workers bound to become traders, who then earn more than bankers. As counterparties employ more traders, the benefit of employing bankers decreases. The model sheds light on the historical evolution of compensation in finance.
Number of Pages in PDF File: 36
Keywords: Traders, Bankers, Compensation, Labor Market, Externalities, Rent-Seeking Activities
JEL Classification: G20, J31, J44
Date posted: November 29, 2011 ; Last revised: May 5, 2015
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