Journal article
Incentive Contracts in Delegated Portfolio Management
The Review of financial studies, Vol.22(11), pp.4681-4714
11/01/2009
DOI: 10.1093/rfs/hhp013
Abstract
This article analyzes optimal nonlinear portfolio management contracts. We consider a setting in which the investor faces moral hazard with respect to the effort and risk choices of the portfolio manager. The employment contract promises the manager: (i) a fixed payment, (ii) a proportional asset-based fee, (iii) a benchmark-linked fulcrum fee, and (iv) a benchmark-linked option-type "bonus" incentive fee. We show that the option-type incentive helps overcome the effort-underinvestment problem that undermines linear contracts. More generally, we find that for the set of contracts we consider, with the appropriate choice of benchmark it is always optimal to include a bonus incentive fee in the contract. We derive the conditions that such a benchmark must satisfy. Our results suggest that current regulatory restrictions on asymmetric performance-based fees in mutual fund advisory contracts may be costly.
Details
- Title: Subtitle
- Incentive Contracts in Delegated Portfolio Management
- Creators
- C. Wei Li - Louisiana State UniversityAshish Tiwari - University of Iowa
- Resource Type
- Journal article
- Publication Details
- The Review of financial studies, Vol.22(11), pp.4681-4714
- Publisher
- Oxford University Press
- DOI
- 10.1093/rfs/hhp013
- ISSN
- 0893-9454
- eISSN
- 1465-7368
- Alternative title
- The Review of Financial StudiesIncentive Contracts in Delegated Portfolio Management
- Language
- English
- Date published
- 11/01/2009
- Academic Unit
- Finance
- Record Identifier
- 9984380540102771
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