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Seeking Alpha: Excess Risk Taking and Competition for Managerial Talent

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  • Viral V. Acharya
  • Marco Pagano
  • Paolo Volpin

Abstract

We present a model in which managers are risk-averse and firms compete for scarce managerial talent ("alpha"). When managers are not mobile across firms, firms provide efficient compensation, which allows for learning about managerial talent and for insurance of low-quality managers. When instead managers can move across firms, firms cannot offer co-insurance among employees. In anticipation, risk-averse managers may churn across firms or undertake aggregate risks in order to delay the revelation of their true quality. The result is excessive risk-taking with pay for short-term performance and an accumulation of long-term risks. We conclude with a discussion of policies to address the inefficiency in compensation.

Suggested Citation

  • Viral V. Acharya & Marco Pagano & Paolo Volpin, 2013. "Seeking Alpha: Excess Risk Taking and Competition for Managerial Talent," NBER Working Papers 18891, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:18891
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • G01 - Financial Economics - - General - - - Financial Crises
    • G2 - Financial Economics - - Financial Institutions and Services
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

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