Portfolio Delegation Under Short-Selling Constraints

Juan Pedro Gomez ()
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Juan Pedro Gomez: Instituto de Empresa

Working Papers Economia from Instituto de Empresa, Area of Economic Environment

Abstract: We study delegated portfolio management when the manager´s ability to short-sell is restricted.Contrary to previous results, we show that under moral hazard, linear performance-adjusted contracts do provide portfolio managers with incentives to gather information.We find that the risk-averse manager´s effort is an increasing function of her share in the portfolio´s return.This result affects the risk-averse investor´s choice of contracts.Unlike previous results, the purely risk-sharing contract is now shown to be suboptimal.Using numerical methods we show that under optimal linear contract, manager´s share in the portfolio return is higher than what it is under a purely risk sharing contract

Keywords: Linear performance-adjusted contracts; Short-selling constraints; Third best effort (search for similar items in EconPapers)
Pages: 28 pages
Date: 2005-01
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Persistent link: https://EconPapers.repec.org/RePEc:emp:wpaper:wp05-07

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