“Reputation and Portfolio Management Contracts” by Heber Farnsworth
Author:
Heber Farnsworth
Washington University in St. Louis
In a dynamic contracting framework I study why it is that investment management contracts always seem to be of the same form: the manager gets a fixed fraction of assets undermanagement every period and investors may invest as much or as little as they like. Investors seem to update their beliefs regarding the manager's skill based on past returns but the fraction of assets under management that forms the fee never seems to change. I show that this is consistent with a world in which managers and investors have different beliefs regarding managerial skill
