Dynamic Contracting in Asset Management Under the Investor-Partner-Manager Relationship

We study incentive contracts in asset management business under dynamic actions and relationships between an investor, a partner of an investment company, and a fund manager of the company. Both the manager and the partner exert costly effort to manage the investments. The investor cannot perfectly observe the partner’s and manager’s actions, and similarly, the partner cannot perfectly observe the manager’s actions. Thus, we consider a hierarchical contracting framework under hidden efforts, where the investor contracts with the partner and the partner contracts with the manager. We show how the actions of the participants and the costs of their actions interact. For instance, the optimal effort of the manager falls in the effort cost of the partner. We extend the model to a case with an investor, a partner, and multiple managers. In this case, each manager’s effort rises in the effectiveness of the managers’ cooperation and falls in the other managers’ effort cost.

Funding: J. Keppo acknowledges funding support from the Singapore Ministry of Education [Grant R-252-000-A08-112] and from the National Research Foundation (Singapore) and Agency for Science, Technology and Research (Singapore) Industry Alignment Fund–Industry Collaboration Projects [Grant I2001E0059]. N. Touzi acknowledges funding from the Chaire Finance and Sustainable development, Risk Foundation, Louis Bachelier Institute. R. Zuo acknowledges funding support from Guangzhou Municipal Science and Technology Project [2023A03J0163 and 2024A04J4546] and the Guangzhou-HKUST(GZ) joint funding program [2024A03J0630].

Supplemental Material: The online appendix is available at https://doi.org/10.1287/opre.2021.0031.