Delegated Portfolio Management: A Survey of the Theoretical Literature
41 Pages Posted: 21 Sep 2005
Date Written: September 2005
Abstract
This paper provides a selective review of the theoretical literature on delegated portfolio management as a principal-agent relationship. The main focus of the paper is to review the analytical issues raised by the peculiar nature of the delegated portfolio management relationship within the broader class of principal-agent models. In particular, the paper discusses the performance of linear vs. nonlinear compensation contracts in a single-period setting, the possible effects of limited liability of portfolio managers, the role of reputational concerns in a multiperiod framework, and the incentives to noise trading. In addition, the paper deals with some general equilibrium dimensions and asset pricing implications of delegated portfolio management. The paper also suggests some directions for future research.
Keywords: Delegated portfolio management, agency, principalagent models, adverse selection, moral hazard
JEL Classification: D82, G11
Suggested Citation: Suggested Citation
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