Incentive Pay and Systemic Risk

41 Pages Posted: 3 Jun 2017 Last revised: 10 May 2018

See all articles by Rui A. Albuquerque

Rui A. Albuquerque

Boston College, Carroll School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Luis M. B. Cabral

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics; Centre for Economic Policy Research (CEPR)

Jose Guedes

Universidade Católica Portuguesa

Multiple version iconThere are 3 versions of this paper

Date Written: May 3, 2018

Abstract

We show that, in the presence of correlated investment opportunities across firms, risk sharing between firm shareholders and firm managers leads to compensation contracts that include relative performance evaluation. These contracts bias investment choices towards correlated investment opportunities, thus creating systemic risk. Furthermore, we show that leverage amplifies all such effects. In the context of the banking industry, we analyze recent policy recommendations regarding firm managerial pay and show how shareholders optimally undo the policies’ intended effects.

Suggested Citation

Albuquerque, Rui A. and Cabral, Luis M. B. and Guedes, Jose, Incentive Pay and Systemic Risk (May 3, 2018). Available at SSRN: https://ssrn.com/abstract=2978003 or http://dx.doi.org/10.2139/ssrn.2978003

Rui A. Albuquerque (Contact Author)

Boston College, Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

HOME PAGE: http://ruialbuquerque.webs.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Luis M. B. Cabral

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States
212-998-0858 (Phone)
212-998-4218 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~lcabral

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Jose Guedes

Universidade Católica Portuguesa ( email )

Lisbon
Portugal

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
85
Abstract Views
565
rank
56,591
PlumX Metrics