Incentivizing Financial Regulators
Forthcoming, Review of Financial Studies
117 Pages Posted: 20 Nov 2017 Last revised: 25 Nov 2022
Date Written: March 28, 2019
I study how promotion incentives within the public sector affect financial regulation. I assemble individual data for all SEC enforcement attorneys between 2002 and 2017, including enforcement cases, salaries, and ranks. Consistent with tournament model, attorneys with stronger promotion incentives are involved in more enforcement, especially against severe financial misconduct, and in tougher settlement terms. For identification, I rely on cross-sectional tests within offices and ranks and on exogenous variation in salaries resulting from a rule-based conversion to a new pay system. The findings highlight a novel link between incentives and regulation and show that the regulator's organizational design affects securities markets.
Keywords: public sector performance, pay inequality, tournaments, security market regulation
JEL Classification: H83, J31, J33, J45, K22, M51, M52
Suggested Citation: Suggested Citation