Bank culture
We develop a model in which bank culture improves upon outcomes attainable with incentive contracting. The bank designs a second-best incentive contract to induce the desired managerial effort allocation across growth and safety, but this induces excessive growth relative to the first best, a distor...
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| Published in: | Journal of financial intermediation 2019-07, Vol.39, p.59-79 |
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| Main Authors: | , |
| Format: | Article |
| Language: | eng |
| Subjects: | |
| Online Access: | Get full text |
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| Summary: | We develop a model in which bank culture improves upon outcomes attainable with incentive contracting. The bank designs a second-best incentive contract to induce the desired managerial effort allocation across growth and safety, but this induces excessive growth relative to the first best, a distortion exacerbated by interbank competition. Bank culture has two effects: it matches managers to banks with similar beliefs, and a safety-oriented culture reduces the competition-induced excessive growth focus. Culture is also contagious – a safety-oriented culture in some banks causes others to follow suit – this effect strengthens with higher bank capital and weakens with stronger safety nets. |
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| ISSN: | 1042-9573 1096-0473 |