Mutual Incentives Research Articles

Mutual Fund Share Classes and Broker Incentives

U.S. SEC Rule 18f-3 allows mutual funds to offer multiple share classes that represent claims on the same underlying assets. Share classes differ with respect to distribution arrangements, which are modified by varying the timing and magnitude of load charges and annual distribution fees. For investors, the choice of share classes depends primarily on the expected holding period. Rule 18f-3 has also given rise to broker compensation arrangements that differ among share classes and, consequently, create for brokers a stake in the class of shares clients purchase. In most circumstances and for most share class structures, brokers have monetary incentives to sell the class of shares that is least advantageous to investors. This conflict of interest is especially troubling because of the probable lack of financial sophistication of investors who pay for investment advice about mutual funds. The adverse incentives are potentially damaging to the mutual fund industry and should provoke a reconsideration of multiple share classes and the accompanying broker compensation arrangements.

Seller—buyer System Co-operation in a Monopolistic Market

This paper deals with a situation in which the buyer is in a monopolistic position with respect to the seller, and examines the issues and advantages of co-operation in a seller-buyer inventory control system. Game theory concepts form the foundation for the analysis of these issues. Initially, the relationship between the seller and the buyer is modelled as a non-cooperative two-stage game, and it is noted that the traditional EOQ formula is one of the results. Then, interactive game theory is utilized to address the problem of system co-operation as well as to determine optimal system order quantity-pricing strategies. Mutual incentives and motivations for system co-operation are also discussed. Among several alternative methods, the combination of an equal profit sharing role implemented via quantity discounting is demonstrated as the best mechanism for achieving system co-operation. Finally, the similarities and differences between the proposed model and those in the literature are discussed.

Managing buyer-seller system cooperation with quantity discount considerations

In this paper we explore cooperative relationships between two members in a simple buyer-seller system where the buyer is in a monopolistic position. We begin with a situation where the seller, as the leader, has the power to enforce his strategies on the buyer, but vice versa is not true. We then extend our analysis to a situation wherein the buyer can also influence the seller's decisions and address the issue of system cooperation. We illustrate the mutual incentives for cooperation and individual disincentives for cooperation. A quantity discount scheme is developed to implement a profit sharing mechanism for achieving equal division of additional cooperative system profits.

The impact of asset specificity on single-period contracting

Asset specificity plays an important role in contracting independently of bounded rationality and opportunism. A model of risk-averse rational maximizers, acting within a state preference framework in which Nature is the only source of risk, predicts that (1) asset specificity reduces the contractual incentives and the scale of commitment by parties to a contract when incentive remains; (2) risk aversion augments the importance of asset specificity; and (3) asset specificity tends to necessitate default premia and lead to larger premia where these are needed to create mutual incentives. Two classes of contractual arrangements are illustrative: those in the construction industry and those associated with debt financing.