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 )

9, Millbank
London SW1P 3GE
United Kingdom

Francois Degeorge

University of Lugano - Faculty of Economics ( email )

via Giuseppe Buffi 13
CH-6904 Lugano
Switzerland
41 58 666 4634 (Phone)
41 58 666 4647 (Fax)

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Richard J. Zeckhauser

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

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-495-1174 (Phone)
617-384-9340 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
617-495-1174 (Phone)
617-496-3783 (Fax)

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