TITLE:
Portfolio Performance on Agency Mechanism with Capability of Manager
AUTHORS:
Haijun Yang, Wei Xia, Jian Fu
KEYWORDS:
The Ability of the Manager, Asymmetric Information, Moral Hazard, Optimal Contraction, Private Information
JOURNAL NAME:
Theoretical Economics Letters,
Vol.8 No.1,
January
4,
2018
ABSTRACT: By given different capabilities of managers, a novel
model of optimal contracting is proposed in agency problems, which adds a new
variable denoted by the manager’s ability in delegated portfolio management.
Then we compare our results with Dybvig and Farnsworth’s (2010) and find a new
effect by appending this variable. The results show that in the first-best
situation with log utility, the optimal contract is in accord with the result
of Dybvig and Farnsworth’s (2010). In the second-best situation, the optimal
contract is a proportional sharing rule plus a bonus. However, the bonus is
associated with variables including private signals and the manager’s ability.
In the third-best situation, the manager’s share is no longer a constant; and
the manager’s fee is no longer a linear combination of the returns, which
depends on the signal and the manager’s ability. So manager’s ability is an
important variable for the market return. We can also find that these
institutional features are more similar to practice than other existing agency
models and consistent with the reality of the situation. The numerical results
also verify the solutions.