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Seeking Alpha: Excess Risk Taking and Competition for Managerial Talent

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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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 312.

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Date of creation: 26 Apr 2012
Date of revision: 10 Apr 2015
Handle: RePEc:sef:csefwp:312
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  1. 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.
  2. 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.
  3. Rüdiger Fahlenbrach & René M. Stulz, 2009. "Bank CEO Incentives and the Credit Crisis," NBER Working Papers 15212, National Bureau of Economic Research, Inc.
  4. Xavier Gabaix & Augustin Landier, 2008. "Why Has CEO Pay Increased So Much?," The Quarterly Journal of Economics, MIT Press, vol. 123(1), pages 49-100, 02.
  5. 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.
  6. Guillaume Plantin & Igor Makarov, 2010. "Rewarding Trading Skills Without Inducing Gambling," 2010 Meeting Papers 899, Society for Economic Dynamics.
  7. 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.
  8. John Thanassoulis, 2011. "The Case For Intervening In Bankers' Pay," Economics Series Working Papers 532, University of Oxford, Department of Economics.
  9. Daniel Gottlieb & Kent Smetters, 2011. "Grade Non-Disclosure," NBER Working Papers 17465, National Bureau of Economic Research, Inc.
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