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Investment banking (and other high profile) careers (2009)
| Citations: | 7 - 0 self |
BibTeX
@MISC{Axelson09investmentbanking,
author = {Ulf Axelson and Philip Bond},
title = {Investment banking (and other high profile) careers},
year = {2009}
}
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Abstract
We analyze a general equilibrium labor market model where moral hazard problems are a key concern. We show that variation in moral hazard across types of jobs explains contract terms, work patterns over time, and promotion structures. We explain why high-profile jobs such as investment banking pay more and give higher utility to the employee than other jobs, even if employees have no skill advantage. These jobs also have high firing rates, and inefficiently long hours. Because dynamic incentives are especially important in high-profile industries, they are hard to enter late in a worker’s career. Therefore, agents who are unlucky early on, either because they do not land a high-profile job or because they lose a high-profile job, suffer life-long disadvantages in the labor market. We also derive two versions of talent misallocation: High profile employers like investment banks may lure workers whose talent would be more valuable elsewhere, and may reject “over qualified ” job applicants — smart workers may be “too hard to manage, ” because their high outside options make them respond less to firing incentives. Finally, we show that moral hazard problems increase in good times for critical sectors in the economy, leading to both higher pay and higher failure rates.
Keyphrases
investment banking high-profile job high profile moral hazard problem job explains contract term good time high firing rate life-long disadvantage critical sector investment banking pay general equilibrium labor market model dynamic incentive failure rate work pattern key concern high profile employer long hour worker career investment bank promotion structure moral hazard talent misallocation skill advantage qualified job applicant smart worker labor market high-profile industry
