Roger Myerson's latest research "A Model of Moral-Hazard Credit Cycles"

Professor Roger Myerson, Nobel Prize Laureate in Economics and a professor at the University of Chicago has recently constructed a model of credit cycles driven by moral hazard in financial intermediation. The basic structure is that investment advisers or bankers must earn moral-hazard rents, but the cost of these rents can be efficiently spread over a banker’s entire career, by promising large back-loaded rewards if the banker achieved a record of consistently successful investments. The dynamic interactions among different generations of bankers can create equilibrium credit cycles with repeated booms and recessions.

This same structure however found conditions when taxing workers to subsidize bankers may increase investment and employment enough to make the workers better off.  In reviewing this result I observe that banker’s investment and the taxed workers are conjoint sets however in world markets we have competition in investment and employment.    In other words, if you tax workers to endow the bankers you must constrain the investment and employment sets or you simply normalize workers and subsidize the bankers.  This is also true over time where advantage to a taxed worker may not be realized in his work age, location or discipline.  Professor Roger Myerson has a compelling model but it would be interesting to see the effects of competition in the sets of bankers and workers in region, discipline and time.