6533b7d0fe1ef96bd125a355

RESEARCH PRODUCT

Dynamic Risk Taking with Bonus Schemes

Dietmar Leisen

subject

Scheme (programming language)Risk levelActuarial scienceRisk aversionCompensation (psychology)media_common.quotation_subjectFinancial risk managementFoundation (evidence)Compensation (engineering)IncentiveDebtEconomicsSigning bonusBusinessDeferralRisk takingGeneral Economics Econometrics and FinancecomputerFinancemedia_commoncomputer.programming_language

description

This paper studies dynamic risk taking by a risk-averse manager who receives a bonus; the company may default on its contractual obligations (debt and fixed compensation). We show that risk taking is time independent, and is summarized by the so-called risk aversion of derived utility. We highlight the importance of dynamic aspects and provide a foundation for common qualitative discussions that are based on characteristics of bonus functions. The paper cautions that deferral of fixed compensation may increase risk taking. Finally, we motivate a new bonus scheme that incentivizes the manager to implement the socially optimal risk level.

yearjournalcountryeditionlanguage
2014-10-23SSRN Electronic Journal
https://doi.org/10.2139/ssrn.1755093