The Ecology of Risk Taking
We analyze the risk level chosen by agents who have private information regarding their quality. We show that even risk-neutral agents will choose risk strategically to enhance their reputation in the market, and that such choices will be influenced by the mix of other agents' types. Assuming that the market has no strong prior about whether the agents are good or bad, good agents will choose low levels of risk, and bad agents high levels. Empirical evidence is gathered on 2462 firms over 24 years. The results support the model: agents of higher quality have less variable performance.
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