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An experimental study of the impact of competition for Other People’s Money: the portfolio manager market

Author

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  • Marina Agranov

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  • Alberto Bisin
  • Andrew Schotter

Abstract

In this paper we experimentally investigate the impact that competing for funds has on the risk-taking behavior of laboratory portfolio managers compensated through an option-like scheme according to which the manager receives (most of) the compensation only for returns in excess of pre-specified strike price. We find that such a competitive environment and contractual arrangement lead, both in theory and in the lab, to inefficient risk taking behavior on the part of portfolio managers. We then study various policy interventions, obtained by manipulating various aspects of the competitive environment and the contractual arrangement, e.g., the Transparency of the contracts offered, the Risk Sharing component in the contract linking portfolio managers to investors, etc. While all these interventions would induce portfolio managers, at equilibrium, to efficiently invest funds in safe assets, we find that, in the lab, Transparency is most effective in incentivising managers to do so. Finally, we document a behavioral “Other People’s Money” effect in the lab, where portfolio managers tend to invest the funds of their investors in a more risky manner than their Own Money, even when it is not in either the investors’ or the managers’ interest to do so. Copyright Economic Science Association 2014

Suggested Citation

  • Marina Agranov & Alberto Bisin & Andrew Schotter, 2014. "An experimental study of the impact of competition for Other People’s Money: the portfolio manager market," Experimental Economics, Springer;Economic Science Association, vol. 17(4), pages 564-585, December.
  • Handle: RePEc:kap:expeco:v:17:y:2014:i:4:p:564-585
    DOI: 10.1007/s10683-013-9384-6
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Ifcher, John & Zarghamee, Homa, 2018. "Behavioral Economic Phenomena in Decision-Making for Others," IZA Discussion Papers 11946, Institute of Labor Economics (IZA).
    2. Kristoffer W. Eriksen & Ola Kvaløy & Miguel Luzuriaga, 2017. "Risk-taking on Behalf of Others," CESifo Working Paper Series 6378, CESifo Group Munich.
    3. Füllbrunn, Sascha & Luhan, Wolfgang J., 2015. "Am I my Peer's Keeper? Social Responsibility in Financial Decision Making," Ruhr Economic Papers 551, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    4. Sandro Casal & Matteo Ploner & Alec N. Sproten, 2019. "Fostering The Best Execution Regime: An Experiment About Pecuniary Sanctions And Accountability In Fiduciary Money Management," Economic Inquiry, Western Economic Association International, vol. 57(1), pages 600-616, January.
    5. repec:zbw:rwirep:0551 is not listed on IDEAS
    6. Sascha Füllbrunn & Wolfgang J. Luhan, 2015. "Am I my Peer‘s Keeper? Social Responsibility in Financial Decision Making," Ruhr Economic Papers 0551, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    7. Jana Freundt & Andreas Lange, 2019. "On the Impact of Risky Private and Public Returns in the Private Provision of Public Goods - The Case of Social Investments," CESifo Working Paper Series 7458, CESifo Group Munich.
    8. Federico Fornasari & Matteo Ploner & Ivan Soraperra, 2015. "Investment in Risk Protection and Social Preferences: An Experimental Study," CEEL Working Papers 1503, Cognitive and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia.
    9. repec:eee:jeborg:v:142:y:2017:i:c:p:24-31 is not listed on IDEAS

    More about this item

    Keywords

    Contracts; Experiments; Competition for funds; D86; D92;

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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