Career Concerns and Excessive Risk Taking

Ying Chen

Journal of Economics & Management Strategy, 2015, vol. 24, issue 1, 110-130

Abstract: In a seminal paper, Holmström () shows that an agent who is unsure of her ability and has a payoff linear in her reputation underinvests in risky projects. I show that if the agent privately knows her ability, then the opposite must happen, that is, she always overinvests in risky projects, no matter what the curvature of her payoff in reputation. Moreover, if project quality is verifiable and the agent is uninformed about her ability, then she reveals project quality and first best is attained; but if she privately knows her ability, first best is not attainable and she still overinvests.

Date: 2015
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