Relative performance evaluation contracts and asset market equilibrium

We analyse the equilibrium consequences of performance-based contracts for fund managers. Managerial remuneration is tied to a fund's absolute and relative performance. Investors choose whether or not to delegate their investment to better-informed fund managers; if they delegate they choose the optimal contract subject to the fund manager's participation constraint. We find that the impact of relative performance evaluation on the equilibrium equity premium and on portfolio herding critically depends on whether the participation constraint is binding. Simple numerical examples suggest that the increased importance of delegation and relative performance evaluation may lower the equity premium

Time is money: life cycle rational inertia and delegation of investment management : [Version November 2013]

We investigate the theoretical impact of including two empirically-grounded insights in a dynamic life cycle portfolio choice model. The first is to recognize that, when managing their own financial wealth, investors incur opportunity costs in terms of current and future human capital accumulation, particularly if human capital is acquired via learning by doing. The second is that we incorporate age-varying efficiency patterns in financial decisionmaking. Both enhancements produce inactivity in portfolio adjustment patterns consistent with empirical evidence. We also analyze individuals’ optimal choice between self-managing their wealth versus delegating the task to a financial advisor. Delegation proves most valuable to the young and the old. Our calibrated model quantifies welfare gains from including investment time and money costs, as well as delegation, in a life cycle setting

Efficient Delegation by an Informed Principal

Consider the case of a firm with private valuation information bargaining with a supplier over the price and quantity of a good. If the firm and the supplier bargain directly, the bargaining outcome may not yield a first-best outcome due to the presence of information rents. The question we examine in this paper is whether these direct bargaining inefficiencies can be eliminated if the firm delegates the authority to negotiate with the supplier to an agent. We model the agent as an independent profit center that contracts with the parent firm as well as the supplier. The delegation of decision-making to the agent can influence the interaction between the firm and the supplier by altering the information rents the agent can claim from the supplier. To identify the role of delegation, we focus instead on two games. Both games have a continuum of equilibria, which we compare to the set of incentive efficient equilibria of the initial no-delegation bargaining game. The first game involves partial delegation as the firm controls the release of its private information through a public transfer price charged to the agent. Because the relationship between the agent and the uninformed supplier is one of full information, the unique equilibrium quantity is first-best yet we show that the informed firm still earns an information rent. The second game involves full delegation as the agent controls both the quantity choice and the release of the firm's private information. We show that the full delegation game has a large set of equilibria that includes all of the incentive efficient equilibria of the bargaining game as well as inefficient equilibria. We believe our notion of partial delegation can be reflected in firms organized as profit centers and the management practice of category managementDelegation, common agency

The Value of Delegation in a Dynamic Agency

In this paper we analyze the value of delegation in a two-period agency. A central management hires an agent to perform a personal effort in each period. Due to time constraints or lack of ability this effort can not be performed by central management. Besides personal effort firm value is influenced by the decision to launch a project which has to be made at the beginning of period two. The project decision can either be delegated to the agent (decentralization) or it can be made by central management (centralization). Under decentralization the agent observes the project’s contribution before its decision. While this captures the benefit of delegation its cost is that the project decision is unobservable and must be motivated together with personal effort via the same incentive contract. In the centralized regime, in contrast, no incentives for the project decision are necessary, however, the project’s actual contribution will not be observed such that the project decision has to be made based on expectations. We analyze optimal performance measurement for both regimes in a linear contracting setting and analyze the variables that affect the value of delegation. We do this for two different contracting regimes: long-term commitment and long-term renegotiation-proof contracts. Trade-offs under both contracting environments differ substantially. In particular, under renegotiation-proof contracts, decentralization might become optimal even if its direct benefit in terms of acquiring specific knowledge about the project vanishes. The reason is that with delegation of the project decision central management implicitly commits to a higher second period incentive rate as personal effort and the project decision must be controlled via the same incentive contract. This is beneficial if renegotiation-proofness requires central management to set too low second-period incentives compared to long-term commitment. A necessary condition for that is, that intertemporal correlation is negative. Contrary to the classical view this result implies that the incentive problem under centralization may become more severe than under decentralization.

Designing Software Architectures As a Composition of Specializations of Knowledge Domains

This paper summarizes our experimental research and software development activities in designing robust, adaptable and reusable software architectures. Several years ago, based on our previous experiences in object-oriented software development, we made the following assumption: ‘A software architecture should be a composition of specializations of knowledge domains’. To verify this assumption we carried out three pilot projects. In addition to the application of some popular domain analysis techniques such as use cases, we identified the invariant compositional structures of the software architectures and the related knowledge domains. Knowledge domains define the boundaries of the adaptability and reusability capabilities of software systems. Next, knowledge domains were mapped to object-oriented concepts. We experienced that some aspects of knowledge could not be directly modeled in terms of object-oriented concepts. In this paper we describe our approach, the pilot projects, the experienced problems and the adopted solutions for realizing the software architectures. We conclude the paper with the lessons that we learned from this experience