The household facing negative equity has an incentive to default.

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The tax deductibility of interest payments on debt gives private-equity executives an incentive to pile extra debt onto the companies they buy, thereby risking the health of these firms for the sake of a tax benefit and the prospect of higher returns.

ECONOMIST: Private equity

Consistent with longstanding practice and his request, Mr. Ballmer does not participate in the equity component of the Incentive Plan.

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"I do for private equity because I think the incentive remains a very attractive one relative to other countries, although there are other countries which have lower incentives, " he said.

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By restructuring mortgages so that homeowners have 5% equity in their properties rather than negative equity, Ocwen creates an incentive for homeowners to keep up with a more affordable payment schedule on a reduced principal.

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"If the equity in the house is sufficiently negative, there may be an incentive for the household to engage in a short sale, " says Anthony Sander, a finance professor at Arizona State University.

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Corporate borrowing rates are at cyclical lows, increasing the incentive for companies to buy back shares and for private-equity groups to launch takeovers.

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Could top management and the board have sold a portion of its equity back to the company, which in turn, could have been used for the incentive pool?

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Incentive compatibility can be achieved mainly not by stock options but by outright grants of equity to managers as part of their compensation, with the restriction that such positions be held for periods that at least exceed the existing holding horizons of controlling shareholders.

ECONOMIST: No soft option