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Seeking Alpha - Excess Risk Taking and Competition for Managerial Talent

  • Viral Acharya

    (New York University)

  • Marco Pagano

    (University of Naples "Federico II" and EIEF)

  • Paolo Volpin

    (Cass Business School)

We present a model where firms compete for scarce managerial talent ("alpha") and managers are risk-averse. When managers cannot move across firms after being hired, employers learn about their talent, allocate them efficiently to projects and provide insurance to low-quality managers. When instead managers can move across firms, firm-level coinsurance is no longer feasible, but managers may self-insure by switching employer to delay the revelation of their true quality. However this results in inefficient project assignment, with low- quality managers handling too risky projects. The model has several empirical predictions and policy implications.

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File URL: http://www.eief.it/files/2015/04/wp-03-seeking-alpha-excess-risk-taking-and-competition-for-managerial-talent.pdf
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Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1303.

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Length: 59 pages
Date of creation: 2013
Date of revision: Apr 2015
Handle: RePEc:eie:wpaper:1303
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  1. Diego Comin & Sunil Mulani, 2006. "Diverging Trends in Aggregate and Firm Volatility," The Review of Economics and Statistics, MIT Press, vol. 88(2), pages 374-383, May.
  2. Fahlenbrach, Rüdiger & Stulz, René M., 2011. "Bank CEO incentives and the credit crisis," Journal of Financial Economics, Elsevier, vol. 99(1), pages 11-26, January.
  3. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," 2006 Meeting Papers 518, Society for Economic Dynamics.
  4. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-74, September.
  5. John Thanassoulis, 2011. "The Case For Intervening In Bankers' Pay," Economics Series Working Papers 532, University of Oxford, Department of Economics.
  6. Malkiel, Burton & Campbell, John & Lettau, Martin & Xu, Yexiao, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Scholarly Articles 3128707, Harvard University Department of Economics.
  7. Daniel Gottlieb & Kent Smetters, 2011. "Grade Non-Disclosure," NBER Working Papers 17465, National Bureau of Economic Research, Inc.
  8. Ing-Haw Cheng & Harrison Hong & Jose Scheinkman, 2010. "Yesterday's Heroes: Compensation and Creative Risk-Taking," NBER Chapters, in: Market Institutions and Financial Market Risk National Bureau of Economic Research, Inc.
  9. Guillaume Plantin & Igor Makarov, 2010. "Rewarding Trading Skills Without Inducing Gambling," 2010 Meeting Papers 899, Society for Economic Dynamics.
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