Career Concerns, Project Choice, and Signaling

Abstract

This paper studies how career concerns affect an agent's choice between a risky and a safe project when the risky project's return depends on its quality and the agent's ability. If the agent does not know her ability, career concerns lead to underinvestment in the risky project, which generalizes a result in Holmstrom (1999). In contrast, if the agent privately knows her ability, then project choice itself signals ability, resulting in overinvestment. Moreover, if project quality is verifiable, first-best is attainable if the agent does not know her ability, but not attainable if she privately knows her ability.