Working Paper: NBER ID: w18891
Authors: Viral V. Acharya; Marco Pagano; Paolo Volpin
Abstract: We present a model in which managers are risk-averse and firms compete for scarce managerial talent ("alpha"). When managers are not mobile across firms, firms provide efficient compensation, which allows for learning about managerial talent and for insurance of low-quality managers. When instead managers can move across firms, firms cannot offer co-insurance among employees. In anticipation, risk-averse managers may churn across firms or undertake aggregate risks in order to delay the revelation of their true quality. The result is excessive risk-taking with pay for short-term performance and an accumulation of long-term risks. We conclude with a discussion of policies to address the inefficiency in compensation.
Keywords: risk-taking; managerial talent; competition; executive compensation
JEL Codes: D62; G01; G2; G32; G38; J38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Competition for managerial talent (M51) | Excessive risk-taking (D81) |
| Excessive risk-taking (D81) | Long-term risks materializing (I12) |
| Managerial mobility (J62) | Difficulty in insuring against risks posed by low-quality managers (G22) |
| Competition for managerial talent (M51) | Negative externality (D62) |
| Negative externality (D62) | Lack of accountability for poor project outcomes (H12) |
| Competition for managerial talent (M51) | Misallocation of managerial resources (D29) |
| Misallocation of managerial resources (D29) | Inefficient project assignments and risk management (H43) |