Informed Trading and High Compensation in Finance
University of Pennsylvania - The Wharton School
University of Texas-Austin
September 11, 2013
We propose a model in which financial firms compete for skilled workers who can be assigned to over-the-counter trading or to more socially productive activities. Because of negative externalities they impose on rival firms, traders earn more than the profits they generate for their employer and more than what other workers with similar skills earn. However, when firms can easily interchange workers across tasks, high trader compensation can also drive up the compensation of other skilled workers in finance above their marginal product. We discuss the impact of restricting compensation on the efficiency of the allocation of workers.
Number of Pages in PDF File: 45
Keywords: Traders, Compensation, Externalities, Rent-Seeking, Financial Expertise
JEL Classification: G20, J31, J44working papers series
Date posted: November 29, 2011 ; Last revised: September 12, 2013
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