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Incentive-Compatible Contracts for the Sale of Information

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Author Info

  • Bruno Biais
  • Laurent Germain

Abstract

An informed financial institution can trade on private information and also sell it to clients through a managed fund. To provide an incentive for the informed agent to trade in the interest of her client, the optimal contract requires that she be compensated as an increasing function of the profits of the fund. The optimal contract is also designed to limit the aggressiveness of the sum of the fund's trade and the proprietary trade. This reduces information revelation and thus leads to greater overall trading profits than if the informed agent only conducted proprietary trades. Copyright 2002, Oxford University Press.

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Bibliographic Info

Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 15 (2002)
Issue (Month): 4 ()
Pages: 987-1003

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Handle: RePEc:oup:rfinst:v:15:y:2002:i:4:p:987-1003

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Web: http://www4.oup.co.uk/revfin/subinfo/

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Citations

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Cited by:
  1. Joanne Yoong & Angela A. Hung, 2009. "Self-Dealing and Compensation for Financial Advisors," Working Papers 713, RAND Corporation Publications Department.
  2. Germain, Laurent, 2005. "Strategic noise in competitive markets for the sale of information," Journal of Financial Intermediation, Elsevier, vol. 14(2), pages 179-209, April.
  3. OZERTURK, Saltuk, 2005. "Stock recommendation of an analyst who trades on own account," CORE Discussion Papers 2005089, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Dev, Pritha, 2013. "Transfer of information by an informed trader," Finance Research Letters, Elsevier, vol. 10(2), pages 58-71.
  5. Ramdan Dridi & Laurent Germain, 2000. "Noise and Competition in Strategic Oligopoly," STICERD - Econometrics Paper Series /2000/395, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  6. Chen, Zhaohui & Wilhelm Jr, William J, 2005. "The Industrial Organization of Financial Market Information Production," CEPR Discussion Papers 5314, C.E.P.R. Discussion Papers.
  7. Saltuk Ozerturk, 2004. "Equilibrium Incentives to Acquire Precise Information in Delegated Portfolio Management," Journal of Financial Services Research, Springer, vol. 25(1), pages 25-36, February.
  8. Biais, Bruno & Glosten, Larry & Spatt, Chester, 2005. "Market microstructure: A survey of microfoundations, empirical results, and policy implications," Journal of Financial Markets, Elsevier, vol. 8(2), pages 217-264, May.
  9. Inci, A. Can, 2012. "Insider trading activity, tenure length, and managerial compensation," Global Finance Journal, Elsevier, vol. 23(3), pages 151-166.
  10. Edelen, Roger M. & Evans, Richard B. & Kadlec, Gregory B., 2012. "Disclosure and agency conflict: Evidence from mutual fund commission bundling," Journal of Financial Economics, Elsevier, vol. 103(2), pages 308-326.

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