Compensation for Crises

Abstract

Whenever the economists talk about the reasons behind any particular crises, much is debated about the fault lines that existed in the economies. The crises may vary from a debt fueled crises to a financial crises or an economic crisis. The government and the central bank in an effort to deal with the crises come up with various tools in their monetary and fiscal capacity like injecting liquidity, quantative easing programs, regulatory measures but often seem to ignore one important component underlying the crises. In this paper, I argue how the incentive structure of the top executives is structured in a manner which further exacerbates the existing fault lines. The incentive structure plays out differently for different financial market participants and also how it often becomes a one way bet where everything to lose if for the shareholders and the common public and everything to gain for is for the top executives in the financial sector.