ABSTRACT
This chapter looks first into the motives and modalities of a public intervention to safeguard financial stability. In a market economy, incentives are provided by market discipline, supported by transparency. However, public authorities may also wish to influence market incentives through recourse to taxation in order to promote financial stability. The role of credit rating agencies, accounting standards, and governance of financial institutions are analyzed in turn. Without fundamentally questioning mark-to-market or fair value accounting, regulators and financial stability policymakers are considering possible perverse incentives. The issue of the level and structure of compensation in the finance industry is first examined, then measures which have been proposed in order to adjust compensation to make it more compatible with financial stability are discussed, and finally, measures which have been adopted are presented. Philippon and Reshef compare wages in the US finance industry to those in the rest of the private sector over the long run..
