Abstract
This article studies the contracting problem between an investor and a professional portfolio manager who possesses market power. The optimal linear contract is obtained in a closed form. When the manager has market power the contract affects the effort level of the manager, which provides a solution to the “non-incentive” result in Stoughton (1993) [30]. The sharing ratio of the portfolio return increases with effort cost, suggesting that a manager with a higher effort cost should be awarded a larger fraction of the investment profit. The sharing ratio also increases with the risk aversion of the portfolio manager. The optimal contract can separate different types of managers since only those with low effort costs would accept a contract when the sharing ratio is given. These findings compliment and extend the results in Stoughton (1993) [30] in which the manager does not have market power.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callMore From: International Journal of Management Science and Engineering Management
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
