Conspicuous Conservatism in Risk Choice

31 Pages Posted: 7 Jun 2007

See all articles by Boaz Moselle

Boaz Moselle

Ofgem

Francois Degeorge

University of Lugano - Faculty of Economics; Swiss Finance Institute; European Corporate Governance Institute (ECGI)

Richard J. Zeckhauser

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Date Written: May 13, 2007

Abstract

We analyze the risk levels chosen by agents who have private information regarding their quality, and whose performance will be judged and rewarded by outsiders. Assume that risk choice is observable. Even risk-neutral agents will choose risk strategically to enhance their expected reputation. We show that conspicuous conservatism is to be expected: agents of different qualities choose levels below those that would be chosen if quality were observable. This happens because bad agents must cloak their identity by choosing the same risk level as good agents, and good agents are more likely to distinguish themselves if they reduce the risk level. Our results contrast starkly with those for the case when risk choice cannot be observed.

Keywords: risk choice, signaling, conservatism

JEL Classification: D81, D82, G30

Suggested Citation

Moselle, Boaz and Degeorge, Francois and Zeckhauser, Richard J., Conspicuous Conservatism in Risk Choice (May 13, 2007). Swiss Finance Institute Research Paper No. 07-15, Available at SSRN: https://ssrn.com/abstract=991533 or http://dx.doi.org/10.2139/ssrn.991533

Boaz Moselle (Contact Author)

Ofgem ( email )

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Francois Degeorge

University of Lugano - Faculty of Economics ( email )

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European Corporate Governance Institute (ECGI)

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Richard J. Zeckhauser

Harvard University - Harvard Kennedy School (HKS) ( email )

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National Bureau of Economic Research (NBER) ( email )

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