Portfolio Delegation Under Short-Selling Constraints
AbstractWe study delegated portfolio management when the managerÂ´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 managerÂ´s effort is an increasing function of her share in the portfolioÂ´s return.This result affects the risk-averse investorÂ´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, managerÂ´s share in the portfolio return is higher than what it is under a purely risk sharing contract
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Bibliographic InfoPaper provided by Instituto de Empresa, Area of Economic Environment in its series Working Papers Economia with number wp05-07.
Length: 28 pages
Date of creation: Jan 2005
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Linear performance-adjusted contracts; Short-selling constraints; Third best effort;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-07-25 (All new papers)
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"The equity premium: a puzzle,"
Levine's Working Paper Archive
1401, David K. Levine.
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