We present a model that explains why investment bankers have struggled in recent years to manage conflicts of interest. The model captures two conflicting dimensions of reputation. On the one hand, banks can build a type reputation for technical competence by performing complex deals that may not serve their clients ’ interest; on the other hand, bankers can sustain a behavior reputation by refraining from doing so. Unproven banks favor type reputation over behavioral reputation; being ethical in our model is a luxury reserved for banks that have proven their abilities. The model also sheds light on conflicts between the trading and advisory divisions of investment banks, as well as the consequences of technological change for time variation in the relative strength of behavior- and type- reputational concerns
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