We present a model where firms compete for scarce managerial talent (“alpha”) and managers are risk-averse. When managers cannot move across firms after being hired, employers learn about their talent, allocate them efficiently to projects and provide insurance to low-quality managers. When instead managers can move across firms, firm-level coinsurance is no longer feasible, but managers may self-insure by switching employer to delay the revelation of their true quality. However this results in inefficient project assignment, with low quality managers handling too risky projects. The model has several empirical predictions and policy implications.
C.V.Starr Professor of Economics
Adolf A. Berle Professor of Law
Scientia Professor in Finance, University of New South Wales