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Compensating Financial Experts

36 Pages Posted: 29 Nov 2011 Last revised: 16 Oct 2017

Vincent Glode

University of Pennsylvania - The Wharton School

Richard Lowery

University of Texas-Austin

Date Written: January 27, 2015

Abstract

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

Glode, Vincent and Lowery, Richard, Compensating Financial Experts (January 27, 2015). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1965538 or http://dx.doi.org/10.2139/ssrn.1965538

Vincent Glode (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Richard Lowery

University of Texas-Austin ( email )

Red McCombs School of Business
Austin, TX 78712
United States

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