Ostrom Game Theory Applied to Financial Services Bonuses and Policy Improvements

Elinor Ostrom's work on sustaining common-pool resources (CPRs) has had a profound impact on the management of natural resources. It has had very little impact on the regulation of the financial services industry. The purpose of this article, which focuses in particular on bonus payments, is to argue that this neglect may result in a number of tools available to regulators, industry and the public being underexploited. Coercivelypowered, external rule-setting and monitoring authorities appear to have insufficient ability on their own to sustain a natural resource system.Using a forest sustainability game as a tool (a common technique in natural resource management flexed to include bonus payments) and undertaken in EY's offices in Dublin, we argue that business students and finance professionals seem to behave very similarly to exploiters of natural resources. Given that degrees of self-governance, cooperation between exploiters, self-monitoring and self-sanctioning are considered critical to sustaining natural resources, this paper considers whether the same may be true of financial services. We use this framework to comment on recent work on modeling the effect of bonus caps and bonus deferral on bankers' risk taking