FIN-03-031 |
NYU Stern School of Business |
September 2003
Jennifer N. Carpenter, Philip H. Dybvig and Heber K. Farnsworth
ABSTRACT
The literature traditionally assumes that a portfolio manager who expends costly
effort to generate information makes an unrestricted portfolio choice and is paid
according to a sharing rule. However, the revelation principle provides a more
efficient institution. If credible communication of the signal is possible, then the
optimal contract restricts portfolio choice and pays the manager a fraction of a
benchmark plus a bonus proportional to performance relative to the benchmark. If
credible communication is not possible, an additional incentive to report extreme
signals may be required to remove a possible incentive to underprovide effort and
feign a neutral signal.
Jennifer N. Carpenter
Institution: Stern School of Business, New York University
Phone: (212) 998-0352
Fax: (212) 995-4233
Email: jcarpen0@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~jcarpen0
Philip H. Dybvig
Institution: Washington University in Saint Louis
Heber K. Farnsworth
Institution: ohn M. Olin School of Business, Washington
University, Campus Box 1133, One Brookings Drive, St. Louis, MO 63130-4899
Telephone: (314) 935-4221
Fax: (314) 935-6359
Email: farnsworth@olin.wustl.edu
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