The Labor Market for Bankers and Regulators

Abstract

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.

Keywords: Financial regulation, banking, fraud, intrinsic benefit, career choice

JEL Classification: G28, J24, J45