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Contracting to compete for flows

Jason Roderick Donaldson and Giorgia Piacentino

Journal of Economic Theory, 2018, vol. 173, issue C, 289-319

Abstract: We present a model in which asset managers design their contracts to attract flows of investor capital. We find that they make their contracts depend on public information, e.g. credit ratings or benchmark indices, as a way to attract flows, rather than as a way to mitigate incentive problems, as has been emphasized in the literature. Unfortunately, asset managers' competition for flows triggers a race to the bottom: asset managers use public information in their contracts even though it is socially inefficient. This inefficiency arises because contracting on public information prevents risk sharing.

Keywords: Delegated asset management; Optimal contracting; Fund flows; Benchmarking; Credit ratings (search for similar items in EconPapers)
JEL-codes: G11 G23 D86 (search for similar items in EconPapers)
Date: 2018
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