THE ROLE OF PRINCIPAL-AGENT CONFLICTS IN THE 1980S THRIFT CRISIS

Agency theory suggests that many of the costs incurred by the taxpayer during the 1980s thrift crisis were the result of conflicts between p rincipals and their agents. This study models the costs associated wit h three distinct types of agency conflicts involved in closing an inso lvent thrift-conflicts between creditors and owners, between owners an d managers, and between taxpayers and government officials. Using a mo del that controls for sample-selection bias, the study presents strong evidence that thrift owners effected wealth transfers from creditors by undertaking high-risk investments, and that government officials pu rsued policies that increased losses to the thrift deposit insurance f und which ultimately were funded by the taxpayer. The results do not s how that managers effected wealth transfers from owners through expens e-preference behavior, but rather that inefficient management increase d the losses of the deposit insurance fund.