Working Paper: CEPR ID: DP12569
Authors: Marina Halac; Ilan Kremer
Abstract: A manager who learns privately about a project over time may want to delay quitting it if recognizing failure/lack of success hurts his reputation. In the banking industry, managers may want to roll over bad loans. How do distortions depend on expected project quality? What are the effects of releasing public information about quality? A key feature of banks is that they learn about project quality from bad news, i.e. a default. We show that in such an environment, distortions tend to increase with expected quality and imperfect information about quality. Results differ if managers instead learn from good news.
Keywords: strategic experimentation; career concerns; dynamic games; private learning; banks; bad loans
JEL Codes: C73; D83; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher expected project quality (L15) | increased distortions in manager behavior (D73) |
| public information about project quality (L15) | non-monotonic effects on distortions (H31) |
| imperfect public signal (D83) | increase in distortions relative to the first-best outcome (H21) |
| good news public signals (H40) | mitigate distortions caused by career concerns (D29) |