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American Economic Review: Vol. 102 No. 5 (August 2012)


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Fund Managers, Career Concerns, and Asset Price Volatility

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Guerrieri, Veronica, and Péter Kondor. 2012. "Fund Managers, Career Concerns, and Asset Price Volatility." American Economic Review, 102(5): 1986-2017.

DOI: 10.1257/aer.102.5.1986


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 default risk. Based on past performance, investors update beliefs on managers and make firing decisions. This leads to career concerns that affect managers' investment decisions, generating a countercyclical "reputational premium." When default risk is high, return on bonds 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. (JEL G11, G12, G23, L84)

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Guerrieri, Veronica (U Chicago)
Kondor, Péter (Central European U, Budapest)

JEL Classifications

G11: Portfolio Choice; Investment Decisions
G12: Asset Pricing; Trading volume; Bond Interest Rates
G23: Pension Funds; Other Private Financial Institutions; Institutional Investors
L84: Personal, Professional, and Business Services

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