Conspicuous conservatism in risk choice
We analyze the risk levels chosen by agents who have private information regarding their quality, and whose performance will be judged and rewarded by outsiders. Assume that risk choice is observable. Agents will choose risk strategically to enhance their expected reputations. We show that conspicuous conservatism results: agents of different qualities choose levels below those that would be chosen if quality were observable. This happens because bad agents must cloak their identity by choosing the same risk level as good agents, and good agents are more likely to distinguish themselves if they reduce the risk level. Our results contrast starkly with those for the case when risk choice cannot be observed. Copyright Springer Science+Business Media, LLC 2007
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Volume (Year): 35 (2007)
Issue (Month): 1 (August)
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Levine's Working Paper Archive
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