Delegation Chains

Abstract

We ask why we observe multiple layers of decision-making in fund management with investors, sponsors, fund managers, and consultants, even if additional decision-makers are costly and do not contribute to superior performance. In our model, an investor hires a wealth manager (“sponsor”), who can delegate asset allocation decisions to a fund manager with investing abilities inferior to her own. Delegation results in lower performance but may be chosen because it reduces the sponsor’s reputational risk: Sub-delegating decisions creates an additional decision-maker who garbles inferences about the sponsor's ability. We characterize when excessive delegation arises and the properties of delegation chains.

Keywords: Career concerns, delegated portfolio management, money management, pension funds, mutual funds

JEL Classification: G23, G34, G10, G11