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Fragility of Reputation and Clustering in Risk Taking

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  • Guillermo Ordonez

    (UCLA)

Abstract

I study the interplay between reputation and risk-taking in a dynamic stochastic environment where it is ex-ante efficient for firms to engage in safe projects, but ex-post preferred to invest in risky ones, appropriating surplus from lenders. By introducing fundamentals, I interpret the model as a dynamic global game in which strategic complementarities arise endogenously from reputation updating, overcoming pervasive multiple equilibria. I find that even though reputation deters opportunistic behavior, it introduces fragile incentives which may lead to large changes in aggregate risk-taking in response to small changes in aggregate fundamentals, inducing financial crises and credit crunches.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 441.

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Date of creation: 2008
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Handle: RePEc:red:sed008:441

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  1. Guerrieri, Veronica & Kondor, Péter, 2011. "Fund Managers, Career Concerns, and Asset Price Volatility," CEPR Discussion Papers 8454, C.E.P.R. Discussion Papers.
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Cited by:
  1. Guillermo L. Ordonez, 2010. "Confidence Banking," 2010 Meeting Papers 310, Society for Economic Dynamics.
  2. Gary B. Gorton & Guillermo Ordonez, 2012. "Collateral Crises," NBER Working Papers 17771, National Bureau of Economic Research, Inc.
  3. Bernardita Vial & Felipe Zurita, 2013. "Reputation-Driven Industry Dynamics," Documentos de Trabajo 436, Instituto de Economia. Pontificia Universidad Católica de Chile..
  4. Guillermo Ordonez, 2013. "Sustainable Shadow Banking," NBER Working Papers 19022, National Bureau of Economic Research, Inc.

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