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
|Date of creation:||Jan 2005|
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- Bhattacharya, Sudipto & Pfleiderer, Paul, 1985. "Delegated portfolio management," Journal of Economic Theory, Elsevier, vol. 36(1), pages 1-25, June.
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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.
- 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 323-50, July.
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- Heinkel, Robert & Stoughton, Neal M, 1994. "The Dynamics of Portfolio Management Contracts," Review of Financial Studies, Society for Financial Studies, vol. 7(2), pages 351-87.
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