DP12569 Experimenting with Career Concerns

Author(s): Marina Halac, Ilan Kremer
Publication Date: January 2018
Keyword(s): bad loans, banks, career concerns, Dynamic games, private learning, strategic experimentation
JEL(s): C73, D83, G21
Programme Areas: Financial Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12569

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.