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http://hdl.handle.net/2451/31368
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| Title: | Seeking Alpha: Excess Risk Taking and Competition for Managerial Talent |
| Authors: | Acharya, Viral V.
Pagano, Marco
Volpin, Paolo |
| Issue Date: | 13-Dec-2011 |
| Series/Report no.: | FIN-11-035 |
| Abstract: | We present a model of labor market equilibrium in which managers are
risk- averse, managerial talent (\alpha") is scarce, and rms seek
alpha, that is, compete for this talent. Firms provide ecient long-term
compensation, which allows for learning about managerial talent and
assigning of managers to tasks based on their talent, when managers are
not mobile across rms. In this case, rms can insure low-quality managers
since high-quality managers have limited outside options. In contrast,
when managers can move across rms, high-quality managers can fully
extract ex post the rents due to their skill, which prevents rms from
providing co-insurance among their employees. In anticipation,
risk-averse managers may churn across firms before their perfor- mance
is fully learnt and thereby prevent their efficient assignment to tasks.
The result is excessive risk-taking with pay for short-term performance
and build up of long-term risks. As the model is suited for the
financial sector, we conclude with analysis of policies to address the
externality in compensation among financial firms. |
| URI: | http://hdl.handle.net/2451/31368 |
| Appears in Collections: | Finance Working Papers
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