We propose a model of delegated portfolio management with career concerns. Investors hire fund managers to invest their capital either in risky bonds or in riskless assets. Some managers have superior information on default risk. Based on past performance, investors update beliefs on
managers and make firing decisions. This leads to career concerns that affect managers' investment decisions, generating a countercyclical ?reputational premium.? When default risk is high, return on bonds is high to compensate uninformed managers for the high risk of being fired. As default
risk changes over time, the reputational premium amplifies price volatility.
The American Economic Review is a general-interest economics journal. The journal is published quarterly and contains articles on a broad range of topics. Established in 1911, the AER is among the nation's oldest and most respected scholarly journals in the economics profession.