Portfolio Performance and Agency
In this paper we analyze the optimal contract for a portfolio manager who can exert effort to improve the quality of a private signal about future market prices. We assume complete markets over states distinguished by asset payoffs and place no restrictions on the form of the contract. We show that trading restrictions are essential because they prevent the manager from undoing the incentive effects of performance-based fees. We provide conditions under which simple benchmarking emerges as optimal compensation. Additional incentives to take risk are necessary when information can be manipulated or else the manager will understate information to offset the benchmarking. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: firstname.lastname@example.org, Oxford University Press.
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Volume (Year): 23 (2010)
Issue (Month): 1 (January)
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References listed on IDEAS
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- Oliver Hart & Bengt Holmstrom, 1986. "The Theory of Contracts," Working papers 418, Massachusetts Institute of Technology (MIT), Department of Economics.
- Jaeyoung Sung, 1995. "Linearity with Project Selection and Controllable Diffusion Rate in Continuous-Time Principal-Agent Problems," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 720-743, Winter. Full references (including those not matched with items on IDEAS)
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