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RESEARCH PRODUCT

Does bonus deferral reduce risk-taking?

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AbstractThe common thinking that deferring bonus payments makes an agent more risk averse isfalse. We characterize continuous-time risk taking and show that the introduction of deferralincreases risk taking at any time when the realized asset value is large or small. For realizedasset values in-between we characterize the parameterizations of deferral for which risk tak-ing decreases and discuss trade-offs in setting the deferral parameters.Keywordsbonus, risk taking, risk aversion, deferral ratioJEL Classi cationG28, G38 ∗ This paper circulated previously under the title \Bonus Deferral Does Not Choke Excessive Risk Taking."We are grateful for comments and suggestions from seminar participants at the Universities of Waterlooand Bonn, as well as from conference participants at the Fourth Annual Risk Management Conference inSingapore and at the 23rd Australasian Banking and Finance Conference. We are particularly grateful toAnand Srinivasan and Louis Velthuis. All remaining errors are ours.