Optimal Contracts for Teams of Money Managers
The optimal organizational form and optimal incentive contract are characterized for a team of money managers, assuming that the investor (principal) is risk averse and that each manager's (agent's) actions affect both that manager's expected return and the correlation of returns between managers. If the managers are risk tolerant, then a noncooperative team organization and a strictly competitive contract, in which each manager is rewarded both for doing well and for doing better than the team, is the most efficient way to discourage herding within the team. This is despite the fact that, in such a contract total wages paid are a concave function of total returns, and so using the contract to discourage herding (and thus achieve lower risk) is in direct conflict with the investor's objective of using the contract to transfer risk onto the managers. As the risk aversion of both the investor and the managers increases, cooperation among managers becomes the optimal way to organize the team. For some parameter values, if everyone is risk averse, first-best can be achieved under cooperation. First-best without herding can never be achieved if the managers are risk tolerant, or if cooperation is infeasible
|Date of creation:||11 Aug 2004|
|Contact details of provider:|| Phone: 1 212 998 3820|
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Khanna, Naveen, 1998. "Optimal Contracting with Moral Hazard and Cascading," Review of Financial Studies, Society for Financial Studies, vol. 11(3), pages 559-596.
- Jerry R. Green & Nancy L. Stokey, 1982.
"A Comparison of Tournaments and Contracts,"
NBER Working Papers
0840, National Bureau of Economic Research, Inc.
- Steve L. Slezak & Naveen Khanna, 2000. "The Effect of Organizational form on Information Flow and Decision Quality: Informational Cascades in Group Decision Making," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(1), pages 115-156, 03.
- Sharpe, W F, 1981. "Decentralized Investment Management," Journal of Finance, American Finance Association, vol. 36(2), pages 217-234, May.
- Stoughton, Neal & Zechner, Josef, 1999. "Optimal Capital Allocation Using RAROC And EVA," CEPR Discussion Papers 2344, C.E.P.R. Discussion Papers.
- Starks, Laura T., 1987. "Performance Incentive Fees: An Agency Theoretic Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(01), pages 17-32, March.
- Ramakrishnan, Ram T S & Thakor, Anjan V, 1991. "Cooperation versus Competition in Agency," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(2), pages 248-283, Fall.
- Palomino, Frederic & Prat, Andrea, 2003.
" Risk Taking and Optimal Contracts for Money Managers,"
RAND Journal of Economics,
The RAND Corporation, vol. 34(1), pages 113-137, Spring.
- Palomino, F.A. & Prat, A., 1998. "Risk Taking and Optimal Contracts for Money Managers," Discussion Paper 1998-108, Tilburg University, Center for Economic Research.
- Palomino, Frédéric & Prat, Andrea, 1999. "Risk Taking and Optimal Contracts for Money Managers," CEPR Discussion Papers 2066, C.E.P.R. Discussion Papers.
- Edward P. Lazear & Sherwin Rosen, 1979.
"Rank-Order Tournaments as Optimum Labor Contracts,"
NBER Working Papers
0401, National Bureau of Economic Research, Inc.
- Philip H. Dybvig & Heber K. Farnsworth & Jennifer Carpenter, 1999.
"Portfolio Performance and Agency,"
New York University, Leonard N. Stern School Finance Department Working Paper Seires
99-046, New York University, Leonard N. Stern School of Business-.
- Daniel N. Deli, 2002. "Mutual Fund Advisory Contracts: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 57(1), pages 109-133, 02.
- Mark Grinblatt & Sheridan Titman, "undated".
"Adverse Risk Incentives and the Design of Performance-Based Contracts,"
Rodney L. White Center for Financial Research Working Papers
21-88, Wharton School Rodney L. White Center for Financial Research.
- Mark Grinblatt & Sheridan Titman, 1989. "Adverse Risk Incentives and the Design of Performance-Based Contracts," Management Science, INFORMS, vol. 35(7), pages 807-822, July.
- Judith Chevalier & Glenn Ellison, 1999. "Career Concerns of Mutual Fund Managers," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 389-432.
- David K. Musto, 1999. "Investment Decisions Depend on Portfolio Disclosures," Journal of Finance, American Finance Association, vol. 54(3), pages 935-952, 06.
- 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.
- Dilip Mookherjee, 1984. "Optimal Incentive Schemes with Many Agents," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 433-446.
When requesting a correction, please mention this item's handle: RePEc:ecm:nawm04:495. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.