Moral Hazard and the Portfolio Management Problem

  • Author(s): NEAL M. STOUGHTON
  • Published: Apr 30, 2012
  • Pages: 2009-2028
  • DOI: 10.1111/j.1540-6261.1993.tb05140.x

ABSTRACT

This paper investigates the significance of nonlinear contracts on the incentive for portfolio managers to collect information. In addition, the manager must be motivated to disclose this information truthfully. We analyze three contracting regimes: (1) first‐best where effort is observable, (2) linear with unobservable effort, and (3) the optimal contract within the Bhattacharya‐Pfleiderer quadratic class. We find that the linear contract leads to a serious lack of effort expenditure by the manager. This underinvestment problem can be successfully overcome through the use of quadratic contracts. These contracts are shown to be asymptotically optimal for very risk‐tolerant principals.

Jump to menu

Main Navigation

Search the Site / Journal

Search Keywords

Search Tips

Members' Login

Credentials

Members' Options

Site Footer

View Mobile Version