This paper analyzes the impact of remuneration practices on banks' risk-taking in a model with fire sales externalities. When these externalities are not internalized by a bank's shareholders and executives, borrowing and fire sales are higher than the socially optimal level. Our analysis shows...

We study policies that regulate executive compensation in a model that jointly determines executives' effort, compensation and firm leverage. The market failure that justifies regulation is that executives are optimistic about asset prices in states of distress. We show that shareholders propose...

This paper surveys the literature that studies the connection between leverage and executive compensation. First, we discuss the dynamics of pay-for-performance compensation and how to measure it. Then we study the theoretical underpinnings of how firm leverage may be related to the compensation...