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

Stracca, Livio, Delegated Portfolio Management: A Survey of the Theoretical Literature (September 2005). ECB Working Paper No. 520, Available at SSRN: https://ssrn.com/abstract=781088 or http://dx.doi.org/10.2139/ssrn.781088

Livio Stracca (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

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