Delegated Learning and Contract Commonality in Asset Management

68 Pages Posted: 1 Jan 2017 Last revised: 18 Feb 2022

See all articles by Michael Sockin

Michael Sockin

University of Texas at Austin - Red McCombs School of Business

Mindy Z. Xiaolan

University of Texas, Austin - Department of Finance

Date Written: January 1, 2017

Abstract

In the presence of moral hazard and costly information acquisition, performance pay and benchmarking arise as part of the optimal contract between investors and fund managers. The commonality in compensation incentives across funds, however, gives rise to externalities that distort expected returns and price informativeness, which feed back into fund manager behavior and investors’ capital allocation to asset management. This commonality contributes to the inconsistency of widely-adopted measures of active manager skill. From a social perspective, it leads to an active management industry whose size and fees do not sufficiently comove with the underlying asset environment.

Keywords: Fund Manager Compensation, Benchmarking, Moral Hazard, Information Acquisition, Contract Externality

Suggested Citation

Sockin, Michael and Xiaolan, Mindy Z., Delegated Learning and Contract Commonality in Asset Management (January 1, 2017). Available at SSRN: https://ssrn.com/abstract=2891616 or http://dx.doi.org/10.2139/ssrn.2891616

Michael Sockin (Contact Author)

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States

Mindy Z. Xiaolan

University of Texas, Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

HOME PAGE: http://sites.google.com/view/mindyxiaolan

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