Portfolio Delegation Under Short-Selling Constraints
We 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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- Mehra, Rajnish & Prescott, Edward C., 1985.
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- Almazan, Andres & Brown, Keith C. & Carlson, Murray & Chapman, David A., 2004. "Why constrain your mutual fund manager?," Journal of Financial Economics, Elsevier, vol. 73(2), pages 289-321, August.
- Stoughton, Neal M, 1993. " Moral Hazard and the Portfolio Management Problem," Journal of Finance, American Finance Association, vol. 48(5), pages 2009-2028, December. Full references (including those not matched with items on IDEAS)
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