Preliminary

We propose a general equilibrium model of defaultable debt where investors hire fund managers to invest their capital either in risky bonds or in a riskless asset. The risky bonds are issued by entrepreneurs who need to \u85nance a risky project and can decide to default ex-post. There is only a small fraction of managers who have private information about the productivity of the risky project and, hence, can predict default. Looking at the past performance, investors update their beliefs on the information of their managers and make hiring and \u85ring decisions. This leads to career concerns which a¤ect the investment decision of uninformed managers, generating a reputational premium. When the default probability is high enough, uninformed managers prefer to invest in the riskless asset to reduce the probability of being \u85red. On the contrary, if the probability of default is low enough, investing in the risky bonds has a reputational advantage and the premium is negative. As the economic and \u85nancial conditions change, the reputational premium can switch sign, magnifying the reaction of prices and capital ows