Finance Papers

Document Type

Journal Article

Date of this Version

2014

Publication Source

Review of Financial Studies

Volume

27

Issue

9

Start Page

2539

Last Page

2579

DOI

10.1093/rfs/hht132

Abstract

We propose a labor market model in which agents with heterogenous ability levels choose to work as bankers or as financial regulators. When workers extract intrinsic benefits from working in regulation (such as public-sector motivation or human capital accumulation), our model jointly predicts that bankers are, on average, more skilled than regulators and their compensation is more sensitive to performance. During financial booms, banks draw the best workers away from the regulatory sector and misbehavior increases. In a dynamic extension of our model, young regulators accumulate human capital and the best ones switch to banking in mid-career.

Copyright/Permission Statement

This is a pre-copyedited, author-produced PDF of an article accepted for publication in Review of Financial Studies following peer review. The version of record is available online at: http://dx.doi.org/10.1093/rfs/hht132.

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Date Posted: 27 November 2017

This document has been peer reviewed.