Conspicuous Conservatism in Risk Choice
31 Pages Posted: 7 Jun 2007
Date Written: May 13, 2007
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: Suggested Citation