Cookies?
Library Header Image
LSE Research Online LSE Library Services

Risk taking and optimal contracts for money managers

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: 15 Sep 2023 22:47
URI: http://eprints.lse.ac.uk/id/eprint/5220

Actions (login required)

View Item View Item