Abstract - Investment banking (and other high profile) careers

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 — booms sow the seeds of their own destruction.

Philip Bond
Room "DZ Bank" (HoF)
Wharton School
07.Jul 2009

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