How to Make Bankers Try Harder to Avoid Going Bust

Noted: A new paper by Dean Corbae of the University of Wisconsin-Madison and Ross Levine of the University of California, Berkeley, presented at this year’s Jackson Hole Economic Symposium, suggests an elegant solution to this dilemma: Regulators should push banks to become more like partnerships. Putting senior employees and executives first in line to bear losses would reduce the damage from crises by tempering their willingness to take bets with skewed risk profiles. The problem is not competition itself, but the effect of competition when bankers are playing with other people’s money.