Paper #695

Títol:

Portfolio delegation under short-selling constraints

Autors:

Juan-Pedro Gómez i Tridib Sharma

Data:

Juny 2003

Resum:

In this paper 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. The risk-averse manager's optimal effort is an increasing function of her share in the portfolio's return. This result affects the risk-averse investor's optimal contract decision. The first best, purely risk-sharing contract is proved to be suboptimal. Using numerical methods we show that the manager's share in the portfolio return is higher than the �rst best share. Additionally, this deviation is shown to be: (i) increasing in the manager's risk aversion and (ii) larger for tighter short-selling restrictions. When the constraint is relaxed the optimal contract converges towards the first best risk sharing contract.

Paraules clau:

Third best effort, linear performance-adjusted contracts, short-selling constraints

Codis JEL:

D81, D82, J33

Àrea de Recerca:

Finances i Comptabilitat

Publicat a:

Economic Theory 28, Issue 1, 173 - 196 May 2006

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