As part of the series of the „Finance Research Seminar“, VGSF welcomes Lucy White from Boston University, Questrom School of Business to present her research paper.
Personal Webpage
Paper
The Making of (Modern) Banks
(joint with Zhao Li and Kebin Ma)
Banks are made of contracts. For a bank to finance productive investment by issuing riskless, money-like claims, its organizational structure (e.g., sole proprietorship, partnership, or public ownership), capital structure, and its bankers’ compensation contracts must be jointly designed to induce banker effort and discourage risk-taking. Our model explains why bankers receive high pay for producing mediocre outcomes, and why pure charter value (or market value of equity) is insufficient to prevent banker risk-taking. Outside shareholders, contributing book equity, are useful despite introducing another layer of agency problems. It is efficient for shareholders to create a ‘big’ bank with multiple bankers and their respective projects and finance those projects with joint liabilities. When bankers’ incentive contracts are opaque, each banker’s pay should depend on the entire bank’s performance even though he exerts control only on his own project.
Back to overview
