DP8905 Seeking Alpha: Excess Risk Taking and Competition for Managerial Talent
|Author(s):||Viral V. Acharya, Marco Pagano, Paolo Volpin|
|Publication Date:||March 2012|
|Keyword(s):||executive compensation, managerial talent, managerial turnover, short-termism|
|JEL(s):||D62, G32, G38, J33|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=8905|
We present a model of labor market equilibrium in which managers are risk-averse, managerial talent (?alpha?) is scarce, and firms seek alpha, that is, compete for this talent. When managers are not mobile across firms, firms provide efficient long-term compensation, which allows for learning about managerial talent and insures low-quality managers. In contrast, when managers can move across firms, high-quality managers can fully extract the rents arising from their skill, which prevents firms from providing co-insurance among their employees. In anticipation, risk-averse managers may churn across firms before their performance is fully learnt and thereby prevent their efficient choice of projects. The result is excessive risk-taking with pay for short-term performance and build up of long-term risks. We conclude with analysis of policies to address the resulting inefficiency in firms' compensation.