Seeking Alpha: Excess Risk Taking and Competition for Managerial Talent

Viral V. Acharya (), Marco Pagano () and Paolo Volpin

No 8905, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We present a model of labor market equilibrium in which managers are risk-averse, managerial talent (‘alpha’) is scarce, and firms seek alpha, that is, compete for this talent. When managers are not mobile across firms, firms provide efficient long-term compensation, which allows for learning about managerial talent and insures low-quality managers. In contrast, when managers can move across firms, high-quality managers can fully extract the rents arising from their skill, which prevents firms from providing co-insurance among their employees. In anticipation, risk-averse managers may churn across firms before their performance is fully learnt and thereby prevent their efficient choice of projects. The result is excessive risk-taking with pay for short-term performance and build up of long-term risks. We conclude with analysis of policies to address the resulting inefficiency in firms' compensation.

Keywords: executive compensation; managerial talent; managerial turnover; short-termism (search for similar items in EconPapers)
JEL-codes: D62 G32 G38 J33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-hrm and nep-ppm
Date: 2012-03
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Related works:
Working Paper: Seeking Alpha - Excess Risk Taking and Competition for Managerial Talent (2013)
Working Paper: Seeking Alpha: Excess Risk Taking and Competition for Managerial Talent (2013)
Working Paper: Seeking Alpha: Excess Risk Taking and Competition for Managerial Talent (2013)
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