IDEAS home Printed from https://ideas.repec.org/a/eee/gamebe/v107y2018icp21-40.html
   My bibliography  Save this article

Reward schemes

Author

Listed:
  • Lagziel, David
  • Lehrer, Ehud

Abstract

An investor has some funds invested through portfolio managers. By the end of the year, she reallocates the funds among these managers according to the managers' performance. While the investor tries to maximize her subjective utility (that depends on the total expected earnings), each portfolio manager tries to maximize the overall amount of funds bestowed in his hands to manage. A reward scheme is a rule that determines how funds should be allocated among the managers based on their performance. A reward scheme is optimal if it induces the (self-interested) managers to act in accordance with the interests of the investor. We show that an optimal reward scheme exists under quite general conditions.

Suggested Citation

  • Lagziel, David & Lehrer, Ehud, 2018. "Reward schemes," Games and Economic Behavior, Elsevier, vol. 107(C), pages 21-40.
    • Handle: RePEc:eee:gamebe:v:107:y:2018:i:c:p:21-40
    DOI: 10.1016/j.geb.2017.10.019
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0899825617301914
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.geb.2017.10.019?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Barry, Christopher B & Starks, Laura T, 1984. "Investment Management and Risk Sharing with Multiple Managers," Journal of Finance, American Finance Association, vol. 39(2), pages 477-491, June.
    2. Bhattacharya, Sudipto & Pfleiderer, Paul, 1985. "Delegated portfolio management," Journal of Economic Theory, Elsevier, vol. 36(1), pages 1-25, June.
    3. Philip H. Dybvig & Heber K. Farnsworth & Jennifer N. Carpenter, 2010. "Portfolio Performance and Agency," The Review of Financial Studies, Society for Financial Studies, vol. 23(1), pages 1-23, January.
    4. Admati, Anat R & Pfleiderer, Paul, 1997. "Does It All Add Up? Benchmarks and the Compensation of Active Portfolio Managers," The Journal of Business, University of Chicago Press, vol. 70(3), pages 323-350, July.
    5. JULES H. Van BINSBERGEN & MICHAEL W. BRANDT & RALPH S. J. KOIJEN, 2008. "Optimal Decentralized Investment Management," Journal of Finance, American Finance Association, vol. 63(4), pages 1849-1895, August.
    6. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
    7. Erik R. Sirri & Peter Tufano, 1998. "Costly Search and Mutual Fund Flows," Journal of Finance, American Finance Association, vol. 53(5), pages 1589-1622, October.
    8. Jonathan B. Berk & Richard C. Green, 2004. "Mutual Fund Flows and Performance in Rational Markets," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1269-1295, December.
    9. David E. M. Sappington, 1991. "Incentives in Principal-Agent Relationships," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 45-66, Spring.
    10. Huck, Steffen & Kübler, Dorothea & Weibull, Jörgen, 2012. "Social norms and economic incentives in firms," Journal of Economic Behavior & Organization, Elsevier, vol. 83(2), pages 173-185.
    11. Stoughton, Neal M, 1993. "Moral Hazard and the Portfolio Management Problem," Journal of Finance, American Finance Association, vol. 48(5), pages 2009-2028, December.
    12. Sylvain Chassang, 2013. "Calibrated Incentive Contracts," Econometrica, Econometric Society, vol. 81(5), pages 1935-1971, September.
    13. Richard A. Ippolito, 1989. "Efficiency with Costly Information: A Study of Mutual Fund Performance, 1965–1984," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(1), pages 1-23.
    14. Dean P. Foster & H. Peyton Young, 2010. "Gaming Performance Fees By Portfolio Managers," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(4), pages 1435-1458.
    15. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-328, March.
    16. Semyon MALAMUD & Evgeny PETROV, 2014. "Portfolio Delegation and Market Efficiency," Swiss Finance Institute Research Paper Series 14-09, Swiss Finance Institute.
    17. Gabriel Carroll, 2015. "Robustness and Linear Contracts," American Economic Review, American Economic Association, vol. 105(2), pages 536-563, February.
    18. Sharpe, W F, 1981. "Decentralized Investment Management," Journal of Finance, American Finance Association, vol. 36(2), pages 217-234, May.
    19. Dasgupta, Amil & Prat, Andrea, 2008. "Information aggregation in financial markets with career concerns," Journal of Economic Theory, Elsevier, vol. 143(1), pages 83-113, November.
    20. Joshua M. Pollet & Mungo Wilson, 2008. "How Does Size Affect Mutual Fund Behavior?," Journal of Finance, American Finance Association, vol. 63(6), pages 2941-2969, December.
    21. Livio Stracca, 2006. "Delegated Portfolio Management: A Survey Of The Theoretical Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 20(5), pages 823-848, December.
    22. , & ,, 2006. "Financial equilibrium with career concerns," Theoretical Economics, Econometric Society, vol. 1(1), pages 67-93, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. David Lagziel & Ehud Lehrer, 2018. "Performance Cycles," Working Papers 1809, Ben-Gurion University of the Negev, Department of Economics.
    2. David Lagziel & Ehud Lehrer, 2021. "Transferable deposits as a screening mechanism," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(2), pages 483-504, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. David Lagziel & Ehud Lehrer, 2021. "Transferable deposits as a screening mechanism," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(2), pages 483-504, March.
    2. Donaldson, Jason Roderick & Piacentino, Giorgia, 2018. "Contracting to compete for flows," Journal of Economic Theory, Elsevier, vol. 173(C), pages 289-319.
    3. Cuoco, Domenico & Kaniel, Ron, 2011. "Equilibrium prices in the presence of delegated portfolio management," Journal of Financial Economics, Elsevier, vol. 101(2), pages 264-296, August.
    4. He, Zhiguo & Xiong, Wei, 2013. "Delegated asset management, investment mandates, and capital immobility," Journal of Financial Economics, Elsevier, vol. 107(2), pages 239-258.
    5. Andrea M. Buffa & Dimitri Vayanos & Paul Woolley, 2022. "Asset Management Contracts and Equilibrium Prices," Journal of Political Economy, University of Chicago Press, vol. 130(12), pages 3146-3201.
    6. Livio Stracca, 2006. "Delegated Portfolio Management: A Survey Of The Theoretical Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 20(5), pages 823-848, December.
    7. Han, Min-Yeon & Jun, Sang-Gyung & Oh, Ji Yeol Jimmy & Kang, Hyoung-Goo, 2023. "Who should choose the money managers? Institutional sponsors' equity manager performance," Pacific-Basin Finance Journal, Elsevier, vol. 78(C).
    8. Sotes-Paladino, Juan & Zapatero, Fernando, 2022. "Carrot and stick: A role for benchmark-adjusted compensation in active fund management," Journal of Financial Intermediation, Elsevier, vol. 52(C).
    9. Cuthbertson, Keith & Nitzsche, Dirk & O'Sullivan, Niall, 2016. "A review of behavioural and management effects in mutual fund performance," International Review of Financial Analysis, Elsevier, vol. 44(C), pages 162-176.
    10. Axel Stahmer, 2015. "Fund flows inducing mispricing of risk in competitive financial markets," ESMT Research Working Papers ESMT-15-04, ESMT European School of Management and Technology.
    11. Agarwal, Vikas & Gómez, Juan-Pedro & Priestley, Richard, 2012. "Management compensation and market timing under portfolio constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 36(10), pages 1600-1625.
    12. Raphaëlle Bellando, 2008. "Le conflit d'agence dans la gestion déléguée de portefeuille : une revue de littérature," Revue d'économie politique, Dalloz, vol. 118(3), pages 317-339.
    13. Alexander, Gordon J. & Baptista, Alexandre M., 2010. "Active portfolio management with benchmarking: A frontier based on alpha," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2185-2197, September.
    14. Basak, Suleyman & Pavlova, Anna & Shapiro, Alex, 2003. "Offsetting the Incentives: Risk Shifting and Benefits of Benchmarking in Money Management," Working papers 4303-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    15. Elton, Edwin J. & Gruber, Martin J., 2013. "Mutual Funds," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1011-1061, Elsevier.
    16. Natasa Bilkic & Thomas Gries, 2014. "Destructive Agents, Finance Firms, and Systemic Risk," Working Papers CIE 76, Paderborn University, CIE Center for International Economics.
    17. Li Xian Liu & Fuming Jiang & Jizhong Li & Omar Al Farooque, 2021. "Antecedents of Equity Fund Performance: A Contingency Perspective," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 24(01), pages 1-40, March.
    18. Galkiewicz, Dominika Paula, 2014. "Manager Characteristics and Credit Derivative Use by U.S. Corporate Bond Funds," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 495, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    19. Salvatore Piccolo & Giovanni W. Puopolo & Luis Vasconcelos, 2016. "Non-Exclusive Financial Advice," Review of Finance, European Finance Association, vol. 20(6), pages 2079-2123.
    20. Michael Sockin & Mindy Z Xiaolan, 2023. "Delegated Learning and Contract Commonality in Asset Management," Review of Finance, European Finance Association, vol. 27(6), pages 1931-1975.

    More about this item

    Keywords

    Reward schemes; Optimal reward schemes; Investment firms; Investment game; Optimal-strategy equilibrium; Market design; Portfolio management;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:gamebe:v:107:y:2018:i:c:p:21-40. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622836 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.