Working Paper: CEPR ID: DP5372
Authors: Amil Dasgupta; Andrea Prat
Abstract: What are the equilibrium features of a dynamic financial market where traders care about their reputation for ability? We modify a standard sequential trading model to study a financial market with career concerns. We show that this market cannot be informationally efficient: there is no equilibrium in which prices converge to the true value, even after an infinite sequence of trades. This finding, which stands in sharp contrast with the results for standard financial markets, is due to the fact that our traders face an endogenous incentive to behave in a conformist manner. We show that there exist equilibria where career-concerned agents trade in a conformist manner when prices have risen or fallen sharply. We also show that each asset carries an endogenous reputational benefit or cost, which may lead to systematic mispricing if asset supply is not infinitely elastic.
Keywords: career concerns; financial equilibrium; information cascades; mispricing
JEL Codes: C7; G0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reputational concerns (M14) | failure in price convergence (D59) |
| Conformist behavior (C92) | systematic mispricing of assets (G19) |
| Reputational benefits/costs (H43) | systematic mispricing (G19) |
| Initial sincere trading (G13) | switch to conformist behavior (C92) |
| Price movements (G13) | conformist behavior (C92) |