But this only strengthens my view that the crisis is due to bad ownership structures.
The question is: why didn’t bank shareholders appreciate that big profits were due just to picking up pennies in front of a steam-roller, to use Taleb’s words, and so change managers' incentives?
There are two possibilities. One is that it is they who were stupid. The other is that they were smart, and dispersed ownership was the problem.
When a firm is owned by hundreds of people, no-one has an incentive to look after it properly - because the hassle of organizing with other shareholders to control or change the management outweighs the benefits of having a better-run company, as these are spread across everyone, including the free-riders who just sat back and did nothing.
Good management is a public good. And public goods get under-supplied when many individuals pursue their own interest.
Banks’ failures are therefore ownership failures.
In this context, this new paper is relevant. So far, the claim that dispersed ownership can be bad is founded in the experience of western banks. But Sanghoon Lee shows that it’s true in a different sample: