Dynamic Incentives for Buy-Side Analysts

39 Pages Posted: 14 May 2019

See all articles by Rahul Deb

Rahul Deb

University of Toronto

Mallesh Pai

Rice University - Department of Economics

Maher Said

NYU Stern School of Business

Date Written: May 3, 2019

Abstract

We develop a dynamic adverse selection model where a career-concerned buy-side analyst advises a fund manager about investment decisions. The analyst's ability is privately known, as is any information she learns over time. The manager wants to elicit information to maximize fund performance while also identifying and retaining high-skill analysts. We characterize the optimal dynamic contract, show that it has several features supported by empirical evidence, and derive novel testable implications. The fund manager's optimal contract both maximizes the value of information and screens out low-skill analysts by incentivizing the analyst to always provide honest advice.

Keywords: buy-side analysts, career concerns, analyst recommendations, forecasting, dynamic mechanism design

JEL Classification: D82, D83, D86, G11, G14, G23

Suggested Citation

Deb, Rahul and Pai, Mallesh and Said, Maher, Dynamic Incentives for Buy-Side Analysts (May 3, 2019). NYU Stern School of Business, Available at SSRN: https://ssrn.com/abstract=3381915 or http://dx.doi.org/10.2139/ssrn.3381915

Rahul Deb

University of Toronto ( email )

Toronto, Ontario M5S 3G8
Canada

HOME PAGE: http://www.economics.utoronto.ca/debrahul/

Mallesh Pai

Rice University - Department of Economics ( email )

6100 South Main Street
Houston, TX 77005
United States

Maher Said (Contact Author)

NYU Stern School of Business ( email )

44 West 4th Street
New York, NY 10012
United States

HOME PAGE: http://www.mahersaid.com/

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