Crisis Diary as it unfolds ….

Crisis of capitalism and Principal-agent problem

Spin doctor is absolutely right.

One of the main culprit of subprime mortgage collapse was principal-agent problem.

For bankers, incentive to cheat and make a quick buck in bonuses was much larger than incentive to earn steady and secure profits for shareholders. There hasn’t been enough discussion surrounding this important area.

Free Markets can work, only if free markets can devise an effective remedy to principal-agent problem. If not, effective regulation is the only alternative.

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February 13, 2009 - Posted by | Opinions | , ,

2 Comments »

  1. Agree..Given the bankers’ big bucks of bonuses and huge incentive mechanisms are one of the key that driving the bankers to forgot about the shareholders interest and in the sametime broke the banks and the nation, perhaps we needs a more solidly founded banking system with stronger government regulation and observance, one that follows the shareholder interest and not that of an individual economic agent achievable at their own desire and greed.

    Comment by Daniel Ng | February 13, 2009

  2. Aniket, glad you agree. I think the challenge is going to be to design contracts that allow for the interests of the employees to be in line with the long term interests of the company.
    Quite interesting that there is a clause in one of the bills going in front of legislators thats allows for claw back of bonuses over $100,000.

    Comment by SpinDoctor | February 13, 2009


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