Compensating Financial Experts
36 Pages Posted: 29 Nov 2011 Last revised: 11 Aug 2020
Date Written: January 27, 2015
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.
Keywords: Traders, Bankers, Compensation, Labor Market, Externalities, Rent-Seeking Activities
JEL Classification: G20, J31, J44
Suggested Citation: Suggested Citation