Menuless and Preference-Free Screening Contracts for Fund Managers
82 Pages Posted: 1 Jun 2021
Date Written: May 30, 2021
We propose a family of incentive contracts that can attract some fund managers who are favored by investors and deter any manager who is unfavorable to some investors. The contract problem has hidden types, hidden actions, hidden knowledge of preferences, and opportunity cost. In contrast to standard screening contracts, our contracts neither depend explicitly on the utilities of the managers and investors nor have a menu of choices. The contracts have two crucial components: (i) a first- loss deposit to be used to offset some of the principal’s losses and (ii) a liquidation boundary. A case study is also given.
Keywords: contract design, performance fees, first-loss, liquidation boundary
JEL Classification: D86, G30, G24
Suggested Citation: Suggested Citation