Abstract: We study the evolution of pay in US bank holding companies since 1986. We first set out the main empirical characteristics in both cross-section and time series focussing on banking structure (size and concentration) and pay characteristics given by labor's share of bank value-added, the level of an average bankers' real compensation and the sensitivity of that compensation to firm performance. Then we introduce a structural model in which bankers of heterogenous talent are matched with banks where shareholders design compensation contracts so as to maximise shareholder payoff in the face of managerial moral hazard. We calibrate this model to see if it provides an internally consistent account of the observed empirical patterns. By incorporating structural changes coinciding with three major changes in banking regulation we are able to reproduce changes in pay level and pay sensitivity observed and to establish a secular decline in labor's share consistent with a superstar firm effect in US banking. Overall we find that the observed pay fits closely to fair pay as predicted by our equilibrium model.
Keywords: Banking industry structure, rent extraction, superstar firms, regulation

Authors:

Ronald W. Anderson - Department of Finance, London School of Economics, Xinhua College of Sun Yat-sen University and CEPR
Karin Jõeveer - Department of Economics and Finance, Tallinn University of Technology

The public research seminars of the Department of Economics and Finance (DEF) at Tallinn University of Technology  usually take place on the second and fourth Wednesdays of the month in both onsite and online format, unless announced otherwise. The presentation will last approximately 45 minutes followed by 15 minutes of discussion. The seminars are held in English. Copies of the paper are usually made available at the seminar. The DEF seminar series is organised in collaboration with the project ”Individual Behaviour and Economic  Performance: Methodological  Challenges and Institutional Context” (IBEP), which has received funding from the European Union’s Horizon 2020 Research and Innovation programme under Grant Agreement No 952574. Questions about the seminar can be sent to the IBEP seminar coordinator Kadri Männasoo, kadri.mannasoo@taltech.ee.