Changing incentives facing financial-services regulators
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This article analyzes incentive conflicts that government officials face in operating a deposit insurance fund. Unresolved principal-agent problems exist between fund managers, the politicians to whom they report, and the taxpayers who constitute the enterprise's ultimate stockholders. Managers' ability to conceal implicit losses creates a conflict between maximizing the present value of the fund's future cash flows and protecting their own reputations and future job prospects. These conflicts move regulators through incentive cross-over points that mark off three behavioral regimes: (1) slow but open adaptation to client innovations; (2) denial of reputation-threatening problem situations; and (3) grudging truth-admittance about long-deferred problems.
KeywordsCash Flow Government Official Open Adaptation Problem Situation Fund Manager
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