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Portfolio Delegation Under Short-Selling Constraints

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  • JUAN PEDRO GOMEZ

    (Instituto de Empresa)

Abstract

We study delegated portfolio management when the manager´s ability to short-sell is restricted.Contrary to previous results, we show that under moral hazard, linear performance-adjusted contracts do provide portfolio managers with incentives to gather information.We find that the risk-averse manager´s effort is an increasing function of her share in the portfolio´s return.This result affects the risk-averse investor´s choice of contracts.Unlike previous results, the purely risk-sharing contract is now shown to be suboptimal.Using numerical methods we show that under optimal linear contract, manager´s share in the portfolio return is higher than what it is under a purely risk sharing contract

Suggested Citation

  • Juan Pedro Gomez, 2005. "Portfolio Delegation Under Short-Selling Constraints," Working Papers Economia wp05-07, Instituto de Empresa, Area of Economic Environment.
    • Handle: RePEc:emp:wpaper:wp05-07
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