Palomino, Frédéric and Prat, Andrea (1999) Risk taking and optimal contracts for money managers. . Centre for Economic Policy Research (Great Britain), London, UK.
Full text not available from this repository.Abstract
Recent empirical work suggests a strong connection between the incentives money managers are offered and their risk-taking behaviour. We develop a general model of delegated portfolio management, with the feature that the agent can control the riskiness of the portfolio. This represents a departure from the existing literature on agency theory in that moral hazard is not only effort exertion but also risk-taking behaviour. The moral hazard problem with risk taking involves an incentive-compatibility constraint on risk, which we characterize. We distinguish between one period and several periods. In the former case, under mild conditions, there exists a first-best contract, which takes the form of a bonus contract. In the latter, we show that there exists no first-best contract and we use a numerical approximation to study the properties of the second-best contract.
| Item Type: | Monograph (Discussion Paper) |
|---|---|
| Official URL: | http://www.cepr.org |
| Additional Information: | © 1999 Frédéric Palomino and Andrea Prat |
| Divisions: | Economics STICERD |
| Subjects: | H Social Sciences > HG Finance |
| JEL classification: | D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions G - Financial Economics > G2 - Financial Institutions and Services > G24 - Investment Banking; Venture Capital; Brokerage; Rating Agencies |
| Date Deposited: | 02 Jun 2008 09:33 |
| Last Modified: | 13 Sep 2024 19:41 |
| URI: | http://eprints.lse.ac.uk/id/eprint/5220 |
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