Palomino, Frédéric and Prat, Andrea (1999) Risk taking and optimal contracts for money managers. 2066. Centre for Economic Policy Research, London, UK.Full text not available from this repository.
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)|
|Additional Information:||© 1999 Frédéric Palomino and Andrea Prat|
|Uncontrolled Keywords:||money managers, risk, moral hazard, limited liability|
|Library of Congress subject classification:||H Social Sciences > HG Finance|
|Journal of Economic Literature Classification System:||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
|Sets:||Collections > Economists Online
Departments > Economics
Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Actions (login required)
|Record administration - authorised staff only|