Dynamic Contracting in Asset Management under Investor-Partner-Manager Relationship

Abstract

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. The investor cannot perfectly observe the partner and manager’s actions, and similarly, the partner cannot perfectly observe the manager’s actions. 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 partner’s fundraising cost. 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 their other managers’ effort cost.