Fund Managers' Contracts and Financial Markets' Short-Termism

This paper considers the problem faced by long-term investors who have to delegate the management of their money to professional fund managers. Investors can earn profits if fund managers collect long-term information. We investigate to what extent the delegation of fund management prevents long-term information acquisition, inducing short-termism. We also study the design of long-term fund managers' compensation contracts. Absent moral hazard, short-termism arises only because of the cost of information acquisition. Under moral hazard, fund managers' compensation endogenously depends on short-term price efficiency (because of the need to smooth fund managers' consumption), thereby on subsequent fund managers' information acquisition decisions. The latter are less likely to be present on the market if information has already been acquired initially, giving rise to a feedback effect. The consequences are twofold: First, this increases short-termism. Second, short-term compensation for fund managers depends in a non-monotonic way on long-term information precision. We derive predictions regarding fund managers' contracts and financial markets efficiency.

Experience, Screening and Syndication in Venture Capital Investments

The objective of this paper is to understand why venture capitalists often syndicate their in-vestments, and how syndication affects their post-investment involvement. We consider a venture capital investment model, in which the quality of investment projects is unknown. Depending on their level of experience, venture capitalists are more or less efficient at screening projects. Screening can also be improved by a second investor appraisal. Obtaining this second piece of in-formation can be costly though, since the initial venture capitalist has to disclose the existence of the investment project to a second investor. The latter becomes de facto a potential competitor, reducing the initial venture capitalist's profits. In this setting, we first establish that syndication can be a coordination device to prevent competition. We then investigate how the syndication decision affects the screening process, and explore the cost of syndication in terms of investment decisions or post-investment involvement of venture capitalists. We conclude with empirical pre-dictions linking the level of experience of venture capitalists, the decision to syndicate, the level of post-investment involvement and the characteristics of the venture capital investments

Fund managers’ contracts and short-termism

This paper considers the problem faced by long-term investors who have to delegate the management of their money to professional fund managers. Investors can earn profits if fund managers collect long-term information. We investigate to what extent the delegation of fund management prevents long-term information acquisition, inducing short-termism in financial markets. We also study the design of long-term fund managers’ compensation contracts. Under moral hazard, fund managers’ compensation optimally depends on both short-term and longterm fund performance. Short-term performance is determined by price efficiency, and thus by subsequent fund managers’ information acquisition decisions. These managers are less likely to be active on the market if information has already been acquired initially, giving rise to a feedback effect. The consequences are twofold: First, short-termism emerges. Second, short-term compensation for fund managers depends in a non-monotonic way on long-term information precision. We derive predictions regarding fund managers’ contracts and financial markets efficiency

The blockchain folk theorem

Blockchains are distributed ledgers, operated within peer-to-peer networks. If reliable and stable, they could offer a new, cost effective way to record transactions, but are they? We model the proof-of-work blockchain protocol as a stochastic game and analyse the equilibrium strategies of rational, strategic miners. Mining the longest chain is a Markov perfect equilibrium, without forking, in line with Nakamoto (2008). The blockchain protocol, however, is a coordination game, with multiple equilibria. There exist equilibria with forks, leading to orphaned blocks and persistent divergence between chains. We also show how forks can be generated by information delays and software upgrades. Last we identify negative externalities implying that equilibrium investment in computing capacity is excessive