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Optimal Asset Management Contracts With Hidden Savings

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  • Sebastian Di Tella
  • Yuliy Sannikov

Abstract

We characterize optimal asset management contracts in a classic portfolio‐investment setting. When the agent has access to hidden savings, his incentives to misbehave depend on his precautionary saving motive. The contract dynamically distorts the agent's access to capital to manipulate his precautionary saving motive and reduce incentives for misbehavior. We provide a sufficient condition for the validity of the first‐order approach, which holds in the optimal contract: global incentive compatibility is ensured if the agent's precautionary saving motive weakens after bad outcomes. We extend our results to incorporate market risk, hidden investment, and renegotiation.

Suggested Citation

  • Sebastian Di Tella & Yuliy Sannikov, 2021. "Optimal Asset Management Contracts With Hidden Savings," Econometrica, Econometric Society, vol. 89(3), pages 1099-1139, May.
    • Handle: RePEc:wly:emetrp:v:89:y:2021:i:3:p:1099-1139
    DOI: 10.3982/ECTA14929
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    Cited by:

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    3. Bruno Biais & Hans Gersbach & Jean-Charles Rochet & Ernst-Ludwig von Thadden & Stéphane Villeneuve, 2024. "Dynamic Contracting with Many Agents," CRC TR 224 Discussion Paper Series crctr224_2023_412v2, University of Bonn and University of Mannheim, Germany.
    4. Park, Jaevin, 2023. "Rights to retrade, free-riding and insurance requirement," Economics Letters, Elsevier, vol. 225(C).

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