Working Paper: CEPR ID: DP8454
Authors: Veronica Guerrieri; Péter Kondor
Abstract: We propose a model of delegated portfolio management with career concerns. Investors hire fund managers to invest their capital either in risky bonds or in riskless assets. Some managers have superior information on the default risk. Looking at the past performance, investors update beliefs on their managers and make firing decisions. This leads to career concerns which a¤ect investment decisions, generating a counter-cyclical 'reputational premium.' When default risk is high, the bond?s return is high to compensate uninformed managers for the high risk of being fired. As default risk changes over time, the reputational premium amplifies price volatility.
Keywords: Amplification; Career Concerns; Delegated Portfolio Management
JEL Codes: D53; D8; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fund managers' career concerns (G11) | reputational premium on the return of risky bonds (G12) |
| reputational premium on the return of risky bonds (G12) | asset price volatility (G19) |
| fund managers' career concerns (G11) | investment decisions (G11) |
| investment decisions (G11) | reputational premium on the return of risky bonds (G12) |
| default risk (G33) | reputational premium on the return of risky bonds (G12) |
| default risk (G33) | asset price volatility (G19) |