Dynamic Contracting in Asset Management under Investor-Partner-Manager Relationship

88 Pages Posted: 18 Feb 2021 Last revised: 22 Dec 2023

See all articles by Jussi Keppo

Jussi Keppo

National University of Singapore (NUS) - NUS Business School

Nizar Touzi

Ecole Polytechnique, Paris

Ruiting Zuo

Fintech Thrust, the Society Hub, Hong Kong University of Science and Technology (GZ)

Date Written: December 20, 2023

Abstract

We study incentive contracts in asset management business under dynamic actions and relationships between an investor, a partner of an investment company, and a fund manager of the company. Both the manager and the partner exert costly effort to manage the investments. The investor cannot perfectly observe the partner and manager’s actions, and similarly, the partner cannot perfectly observe the manager’s actions. Thus, we consider a hierarchical contracting framework under hidden efforts, where the investor contracts with the partner and the partner contracts with the manager. We show how the actions of the participants and the costs of their actions interact. For instance, the optimal effort of the manager falls in the effort cost of the partner. We extend the model to a case with an investor, a partner, and multiple managers. In this case, each manager’s effort rises in the effectiveness of the managers’ cooperation and falls in the other managers’ effort cost.

Keywords: Principal-agent model, moral hazard, stochastic optimal control

JEL Classification: C02, D21, D86, G23, J33

Suggested Citation

Keppo, Jussi and Touzi, Nizar and Zuo, Ruiting, Dynamic Contracting in Asset Management under Investor-Partner-Manager Relationship (December 20, 2023). Available at SSRN: https://ssrn.com/abstract=3761499 or http://dx.doi.org/10.2139/ssrn.3761499

Jussi Keppo (Contact Author)

National University of Singapore (NUS) - NUS Business School ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://https://www.jussikeppo.com

Nizar Touzi

Ecole Polytechnique, Paris ( email )

1 rue Descartes
Paris, 75005
France

Ruiting Zuo

Fintech Thrust, the Society Hub, Hong Kong University of Science and Technology (GZ) ( email )

+86 18256944842 (Phone)

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