Risk Taking Incentives and the Great Financial Crisis *

Jean-Pierre Danthine (1, 2, 3, 4)

1 CEPR - Center for Economic Policy Research
2 UNIL - Université de Lausanne = University of Lausanne
3 PJSE - Paris Jourdan Sciences Economiques
4 PSE - Paris School of Economics

High leverage distorts the purpose of limited liability. Limited liability is a design feature intended to promote risk taking. It is not appropriate in situations where decision-makers are prone to socially excessive risk taking. While much progress has been made to correct risk taking incentives in banking under Basel 3, not enough has been done to address the toxic cocktail resulting from combining high leverage with limited liability. Deferred compensation schemes should be generalized and bonus payments in the form of high trigger Cocos should be promoted.

Keywords: risk taking; financial crisis

Domains: Economics and Finance

Jean-Pierre Danthine. Risk Taking Incentives and the Great Financial Crisis *. 2017. ⟨halshs-01571627⟩