Relative Performance Evaluation Contracts and Asset Market Equilibrium

Allan Timmermann and Sandeep Kapur

No 4038, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyse the equilibrium consequences of performance-based contracts for fund managers. Managerial remuneration is tied to a fund's absolute performance and its performance relative to rival funds. Investors choose whether or not to delegate their investment to better-informed fund managers; if they delegate they choose the parameters of the optimal contract subject to the fund manager's participation constraint. We find that the impact of relative performance evaluation on equilibrium equity premium and on portfolio-herding critically depends on whether the participation constraint is binding. Simple numerical examples suggest that the increased importance of delegation and performance evaluation may lower the equity premium.

Keywords: Portfolio delegation; Relative performance evaluation; Equity premium (search for similar items in EconPapers)
JEL-codes: G11 G12 G23 (search for similar items in EconPapers)
Date: 2003-09
New Economics Papers: this item is included in nep-ifn
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Related works:
Journal Article: Relative Performance Evaluation Contracts and Asset Market Equilibrium (2005)
Working Paper: Relative Performance Evaluation Contracts and Asset Market Equilibrium (2005)
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