Menuless and Preference-Free Screening Contracts for Fund Managers

82 Pages Posted: 1 Jun 2021

See all articles by Xue Dong He

Xue Dong He

The Chinese University of Hong Kong - Department of Systems Engineering and Engineering Management

Sang Hu

The Chinese University of Hong Kong, Shenzhen

Steven Kou

Boston University

Date Written: May 30, 2021

Abstract

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

He, Xue Dong and Hu, Sang and Kou, Steven, Menuless and Preference-Free Screening Contracts for Fund Managers (May 30, 2021). Available at SSRN: https://ssrn.com/abstract=3856785 or http://dx.doi.org/10.2139/ssrn.3856785

Xue Dong He

The Chinese University of Hong Kong - Department of Systems Engineering and Engineering Management ( email )

505 William M.W. Mong Engineering Building
The Chinese University of Hong Kong, Shatin, N.T.
Hong Kong
Hong Kong

HOME PAGE: http://https://sites.google.com/site/xuedonghepage/home

Sang Hu

The Chinese University of Hong Kong, Shenzhen ( email )

Shenzhen
China

Steven Kou (Contact Author)

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
6173583318 (Phone)

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