Intrinsic Motivation and Optimal Incentive Contracts
In: The Rand journal of economics, Band 33, Heft 4, S. 650
ISSN: 1756-2171
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In: The Rand journal of economics, Band 33, Heft 4, S. 650
ISSN: 1756-2171
In: American economic review, Band 90, Heft 1, S. 147-165
ISSN: 1944-7981
In a dynamic model of moral hazard, competition can undermine prudent bank behavior. While capital-requirement regulation can induce prudent behavior, the policy yields Pareto-inefficient outcomes. Capital requirements reduce gambling incentives by putting bank equity at risk. However, they also have a perverse effect of harming banks' franchise values, thus encouraging gambling. Pareto-efficient outcomes can be achieved by adding deposit-rate controls as a regulatory instrument, since they facilitate prudent investment by increasing franchise values. Even if deposit-rate ceilings are not binding on the equilibrium path, they may be useful in deterring gambling off the equilibrium path. (JEL G2, E4, L5)