Delegation chains

Amil Dasgupta and Ernst Maug

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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: Offloading decisions to fund managers creates an additional decision-maker who may be responsible for inferior performance and 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 (search for similar items in EconPapers)
JEL-codes: G10 G11 G23 G34 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2022-05-17
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:118852

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